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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-Q

|  |  |                                                  
|- |  | -------------------------------------------------
|þ |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) 
|  |  | OF THE SECURITIES EXCHANGE ACT OF 1934.          
|  |  |                                                  
|  |  | For the quarterly period ended September 30, 2003

or


|  |  |                                                            
|- |  | -----------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)          
|  |  | OF THE SECURITIES EXCHANGE ACT OF 1934.                    
|  |  |                                                            
|  |  | For the Transition period from             to             .

Commission File Number 333-40907

TOWN SPORTS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


|                                |  |                       
|------------------------------- |  | ----------------------
|New York                        |  | 13-2749906            
|(State or other Jurisdiction of |  | (I.R.S. Employer      
|Incorporation or organization)  |  | Identification Number)

888 Seventh Avenue
New York, New York 10106
Telephone: (212) 246-6700(Address, zip code, and telephone number, including
area code, of registrants principal executive office.)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 and 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes
þ    No o

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).

Yes o    No þ

As of November 4, 2003 date there were 1,176,043 shares of Class A Common
Stock of the Company outstanding.



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TABLE OF CONTENTS



|                           |                                                                                               |                                                      |  |  |  |  |  | 
|-------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|                           |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                           |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                           |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                           |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                           | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                           | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                           | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION
|                           | Item 1. Legal Proceedings.                                                                   
|                           | Item 2. Changes in Securities.                                                               
|                           | Item 3. Defaults Upon Senior Securities.                                                     
|                           | Item 4. Submission of Matters to a Vote of Security Holders.                                 
|                           | Item 5. Other Information.                                                                   
|                           | Item 6. Exhibits and Reports on Form 8-K.                                                    
|SIGNATURES                
|SECTION 302 CERTIFICATION 
|SECTION 302 CERTIFICATION 
|SECTION 302 CERTIFICATION 
|SECTION 906 CERTIFICATION 
|SECTION 906 CERTIFICATION 



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TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003

INDEX

|                              |                                                                                                |                                                                                                                    |    |      |   | 
|----------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | -- | ---- | - | 
|                              |                                                                                                |                                                                                                                    |    | Page
|                              |                                                                                                |                                                                                                                    |    |     
|PART I. FINANCIAL INFORMATION |                                                                                                |                                                                                                                    |    |     
|                              | Item 1. Financial Statements (Unaudited)                                                       |                                                                                                                    |    |      |  
|                              |                                                                                                | a) Condensed Consolidated Balance Sheets as of December 31, 2002 and September 30, 2003                            |    |      | 2 | 
|                              |                                                                                                | b) Condensed Consolidated Statements of Operations for the three and nine months ended September 30,
2002 and 2003 |    |      | 3 | 
|                              |                                                                                                | c) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2003           |    |      | 4 | 
|                              |                                                                                                | d) Notes to Condensed Consolidated Financial Statements                                                            |    |      | 5 | 
|                              | Item 2. Managements Discussion and Analysis of Financial Conditions and Results of Operations |                                                                                                                    |    | 17   |  
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                             |                                                                                                                    |    | 22   |  
|                              | Item 4. Controls and Procedures                                                                |                                                                                                                    |    | 22   |  
|PART II. OTHER INFORMATION    |                                                                                                |                                                                                                                    |    |     
|                              | Item 1. Legal Proceedings                                                                      |                                                                                                                    |    | 23   |  
|                              | Item 2. Change in Securities                                                                   |                                                                                                                    |    | 23   |  
|                              | Item 3. Defaults upon Senior Securities                                                        |                                                                                                                    |    | 23   |  
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                    |                                                                                                                    |    | 23   |  
|                              | Item 5. Other Information                                                                      |                                                                                                                    |    | 23   |  
|                              | Item 6. Exhibits and Reports on Form-8-K                                                       |                                                                                                                    |    | 23   |  
|SIGNATURES                    |                                                                                                |                                                                                                                    | 24 |     

1



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##### Table of Contents



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED BALANCE SHEETS

All figures $000, except share data
December 31, 2002 and September 30, 2003


|                                                                                                                                                                                         |                                                                                                                                                          |                                                                         |         |              |         |               |         |             |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------- | ------------ | ------- | ------------- | ------- | ----------- | ------- | -
|                                                                                                                                                                                         |                                                                                                                                                          |                                                                         |         | December 31, |         | September 30,
|                                                                                                                                                                                         |                                                                                                                                                          |                                                                         |         | 2002         |         | 2003         
|                                                                                                                                                                                         |                                                                                                                                                          |                                                                         |         |              |         |              
|                                                                                                                                                                                         |                                                                                                                                                          |                                                                         |         |              |         |               |         | (Unaudited)
|Assets                                                                                                                                                                                   |                                                                                                                                                          |                                                                         |         |              |         |               |         |            
|Current assets:                                                                                                                                                                          |                                                                                                                                                          |                                                                         |         |              |         |               |         |            
|                                                                                                                                                                                         | Cash and cash equivalents                                                                                                                                |                                                                         | $       | 5,551        |         |               | $       | 55,784      |        
|                                                                                                                                                                                         | Accounts receivable, net of allowance for doubtful accounts of $120 and $482 at December 31, 2002
and September 30, 2003, respectively                   |                                                                         |         | 1,333        |         |               |         | 1,002       |        
|                                                                                                                                                                                         | Inventory                                                                                                                                                |                                                                         |         | 1,132        |         |               |         | 787         |        
|                                                                                                                                                                                         | Prepaid corporate income taxes                                                                                                                           |                                                                         |         | 3,012        |         |               |         | 1,571       |        
|                                                                                                                                                                                         | Prepaid expenses and other current assets                                                                                                                |                                                                         |         | 4,430        |         |               |         | 5,816       |        
|                                                                                                                                                                                         |                                                                                                                                                          |                                                                         |         |              |         |               |         |            
|                                                                                                                                                                                         |                                                                                                                                                          | Total current assets                                                    |         |              | 15,458  |               |         |             | 64,960  |  
|Fixed assets, net of accumulated depreciation of $104,488 and $125,429 at December 31, 2002 and
September 30, 2003, respectively                                                         |                                                                                                                                                          |                                                                         | 210,823 |              |         |               | 215,098 |            
|Goodwill                                                                                                                                                                                 |                                                                                                                                                          |                                                                         | 45,531  |              |         |               | 45,663  |            
|Intangible assets, net of accumulated amortization of $10,478 and $11,193 at December 31, 2002 and
September 30, 2003, respectively                                                      |                                                                                                                                                          |                                                                         | 1,675   |              |         |               | 836     |            
|Deferred tax asset, net                                                                                                                                                                  |                                                                                                                                                          |                                                                         | 20,254  |              |         |               | 18,175  |            
|Deferred membership costs                                                                                                                                                                |                                                                                                                                                          |                                                                         | 14,408  |              |         |               | 14,360  |            
|Other assets                                                                                                                                                                             |                                                                                                                                                          |                                                                         | 6,101   |              |         |               | 10,367  |            
|                                                                                                                                                                                         |                                                                                                                                                          |                                                                         |         |              |         |               |         |            
|                                                                                                                                                                                         |                                                                                                                                                          | Total assets                                                            |         | $            | 314,250 |               |         | $           | 369,459 |  
|                                                                                                                                                                                         |                                                                                                                                                          |                                                                         |         |              |         |               |         |             |        
|Liabilities, Redeemable Preferred Stock and Stockholders
Deficit                                                                                                                        |                                                                                                                                                          |                                                                         |         |              |         |               |         |            
|Current liabilities:                                                                                                                                                                     |                                                                                                                                                          |                                                                         |         |              |         |               |         |            
|                                                                                                                                                                                         | Current portion of long-term debt and capital lease obligations                                                                                          |                                                                         | $       | 5,178        |         |               | $       | 4,198       |        
|                                                                                                                                                                                         | Accounts payable                                                                                                                                         |                                                                         |         | 5,328        |         |               |         | 3,639       |        
|                                                                                                                                                                                         | Accrued interest                                                                                                                                         |                                                                         |         | 2,731        |         |               |         | 11,264      |        
|                                                                                                                                                                                         | Accrued expenses                                                                                                                                         |                                                                         |         | 18,903       |         |               |         | 21,306      |        
|                                                                                                                                                                                         | Deferred revenue                                                                                                                                         |                                                                         |         | 26,510       |         |               |         | 28,068      |        
|                                                                                                                                                                                         |                                                                                                                                                          |                                                                         |         |              |         |               |         |            
|                                                                                                                                                                                         |                                                                                                                                                          | Total current liabilities                                               |         |              | 58,650  |               |         |             | 68,475  |  
|Long-term debt and capital lease obligations                                                                                                                                             |                                                                                                                                                          |                                                                         | 155,765 |              |         |               | 259,088 |            
|Deferred lease liabilities                                                                                                                                                               |                                                                                                                                                          |                                                                         | 23,644  |              |         |               | 25,365  |            
|Deferred revenue                                                                                                                                                                         |                                                                                                                                                          |                                                                         | 3,435   |              |         |               | 3,569   |            
|Other liabilities                                                                                                                                                                        |                                                                                                                                                          |                                                                         | 7,530   |              |         |               | 7,928   |            
|                                                                                                                                                                                         |                                                                                                                                                          |                                                                         |         |              |         |               |         |            
|                                                                                                                                                                                         |                                                                                                                                                          | Total liabilities                                                       |         |              | 249,024 |               |         |             | 364,425 |  
|                                                                                                                                                                                         |                                                                                                                                                          |                                                                         |         |              |         |               |         |            
|Redeemable preferred stock:                                                                                                                                                              |                                                                                                                                                          |                                                                         |         |              |         |               |         |            
|Redeemable senior preferred stock, $1.00 par value; liquidation value $64,512 at December 31,
2002; authorized 100,000 shares; 40,000 shares issued and outstanding at December 31, 2002 |                                                                                                                                                          |                                                                         | 62,125  |              |         |               |        |            
|Series A preferred stock, at liquidation value 153,637 shares issued and outstanding at December 31,
2002 and September 30, 2003                                                         |                                                                                                                                                          |                                                                         | 34,841  |              |         |               | 38,585  |            
|                                                                                                                                                                                         |                                                                                                                                                          |                                                                         |         |              |         |               |         |            
|                                                                                                                                                                                         |                                                                                                                                                          |                                                                         | 96,966  |              |         |               | 38,585  |            
|                                                                                                                                                                                         |                                                                                                                                                          |                                                                         |         |              |         |               |         |            
|Stockholders deficit:                                                                                                                                                                   |                                                                                                                                                          |                                                                         |         |              |         |               |         |            
|                                                                                                                                                                                         | Series B preferred stock, at liquidation value 3,822 and 109,541 shares issued and outstanding at
December 31, 2002 and September 30, 2003, respectively |                                                                         |         | 303          |         |               |         | 9,636       |        
|                                                                                                                                                                                         | Class A voting common stock, $.001 par value; issued and outstanding 1,176,043 shares                                                                    |                                                                         |         | 1            |         |               |         | 1           |        
|                                                                                                                                                                                         | Paid-in capital                                                                                                                                          |                                                                         |         | (32,149      | )       |               |         | (41,130     | )      
|                                                                                                                                                                                         | Unearned compensation                                                                                                                                    |                                                                         |         | (278         | )       |               |         | (248        | )      
|                                                                                                                                                                                         | Accumulated other comprehensive income (currency translation adjustment)                                                                                 |                                                                         |         | 293          |         |               |         | 400         |        
|                                                                                                                                                                                         | Retained earnings (Accumulated deficit)                                                                                                                  |                                                                         |         | 90           |         |               |         | (2,210      | )      
|                                                                                                                                                                                         |                                                                                                                                                          |                                                                         |         |              |         |               |         |            
|                                                                                                                                                                                         |                                                                                                                                                          | Total stockholders deficit                                             |         |              | (31,740 | )             |         |             | (33,551 | )
|                                                                                                                                                                                         |                                                                                                                                                          |                                                                         |         |              |         |               |         |            
|                                                                                                                                                                                         |                                                                                                                                                          | Total liabilities, redeemable preferred stock and stockholders deficit |         | $            | 314,250 |               |         | $           | 369,459 |  
|                                                                                                                                                                                         |                                                                                                                                                          |                                                                         |         |              |         |               |         |             |        

See notes to the condensed consolidated financial statements.

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TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2002 and 2003
All figures $000
(Unaudited)

|                                                                                                                                                 |                                                                               |  |                    |        |                   |  |        |        |      |  |         |         |   |  |         |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ------ | ------ | ---- |  | ------- | ------- | - |  | ------- | ------- | -
|                                                                                                                                                 |                                                                               |  | Three Months Ended |        | Nine Months Ended
|                                                                                                                                                 |                                                                               |  | September 30,      |        | September 30,    
|                                                                                                                                                 |                                                                               |  |                    |        |                  
|                                                                                                                                                 |                                                                               |  | 2002               |        | 2003              |  | 2002   |        | 2003
|                                                                                                                                                 |                                                                               |  |                    |        |                   |  |        |        |     
|Revenues:                                                                                                                                        |                                                                               |  |                    |        |                   |  |        |        |      |  |         |         |   |  |         |        
|                                                                                                                                                 | Club operations                                                               |  | $                  | 80,219 |                   |  | $      | 84,436 |      |  | $       | 235,258 |   |  | $       | 254,219 |  
|                                                                                                                                                 | Fees and other                                                                |  |                    | 1,093  |                   |  |        | 2,335  |      |  |         | 2,935   |   |  |         | 5,511   |  
|                                                                                                                                                 |                                                                               |  |                    |        |                   |  |        |        |      |  |         |         |   |  |         |        
|                                                                                                                                                 |                                                                               |  | 81,312             |        |                   |  | 86,771 |        |      |  | 238,193 |         |   |  | 259,730 |        
|                                                                                                                                                 |                                                                               |  |                    |        |                   |  |        |        |      |  |         |         |   |  |         |        
|Operating expenses:                                                                                                                              |                                                                               |  |                    |        |                   |  |        |        |      |  |         |         |   |  |         |        
|                                                                                                                                                 | Payroll and related                                                           |  |                    | 32,617 |                   |  |        | 32,647 |      |  |         | 96,579  |   |  |         | 98,623  |  
|                                                                                                                                                 | Club operating                                                                |  |                    | 26,189 |                   |  |        | 28,761 |      |  |         | 74,218  |   |  |         | 82,115  |  
|                                                                                                                                                 | General and administrative                                                    |  |                    | 4,995  |                   |  |        | 5,677  |      |  |         | 14,799  |   |  |         | 15,917  |  
|                                                                                                                                                 | Depreciation and amortization                                                 |  |                    | 7,752  |                   |  |        | 8,782  |      |  |         | 23,486  |   |  |         | 25,535  |  
|                                                                                                                                                 |                                                                               |  |                    |        |                   |  |        |        |      |  |         |         |   |  |         |        
|                                                                                                                                                 |                                                                               |  | 71,553             |        |                   |  | 75,867 |        |      |  | 209,082 |         |   |  | 222,190 |        
|                                                                                                                                                 |                                                                               |  |                    |        |                   |  |        |        |      |  |         |         |   |  |         |        
|                                                                                                                                                 | Operating income                                                              |  |                    | 9,759  |                   |  |        | 10,904 |      |  |         | 29,111  |   |  |         | 37,540  |  
|Loss on extinguishment of debt                                                                                                                   |                                                                               |  |                   |        |                   |  |       |        |      |  |        |         |   |  | 7,773   |        
|Interest expense                                                                                                                                 |                                                                               |  | 4,112              |        |                   |  | 6,760  |        |      |  | 12,398  |         |   |  | 17,106  |        
|Interest income                                                                                                                                  |                                                                               |  | (38                | )      |                   |  | (179   | )      |      |  | (116    | )       |   |  | (397    | )      
|                                                                                                                                                 |                                                                               |  |                    |        |                   |  |        |        |      |  |         |         |   |  |         |        
|                                                                                                                                                 | Income from continuing operations before provision for corporate
income taxes |  |                    | 5,685  |                   |  |        | 4,323  |      |  |         | 16,829  |   |  |         | 13,058  |  
|Provision for corporate income taxes                                                                                                             |                                                                               |  | 2,846              |        |                   |  | 1,989  |        |      |  | 8,060   |         |   |  | 6,004   |        
|                                                                                                                                                 |                                                                               |  |                    |        |                   |  |        |        |      |  |         |         |   |  |         |        
|                                                                                                                                                 | Income from continuing operations                                             |  |                    | 2,839  |                   |  |        | 2,334  |      |  |         | 8,769   |   |  |         | 7,054   |  
|Loss on discontinued operations, net of income tax benefit of $478 and
$562 for the three and nine months ended September 30, 2002,
respectively |                                                                               |  | (710               | )      |                   |  |       |        |      |  | (826    | )       |   |  |        |        
|Cumulative effect of a change in accounting principle, net of income
tax benefit of $612                                                         |                                                                               |  |                   |        |                   |  |       |        |      |  | (689    | )       |   |  |        |        
|                                                                                                                                                 |                                                                               |  |                    |        |                   |  |        |        |      |  |         |         |   |  |         |        
|                                                                                                                                                 | Net income                                                                    |  |                    | 2,129  |                   |  |        | 2,334  |      |  |         | 7,254   |   |  |         | 7,054   |  
|Accreted dividends on preferred stock                                                                                                            |                                                                               |  | (2,958             | )      |                   |  | (1,631 | )      |      |  | (8,552  | )       |   |  | (9,269  | )      
|                                                                                                                                                 |                                                                               |  |                    |        |                   |  |        |        |      |  |         |         |   |  |         |        
|                                                                                                                                                 | Net income (loss) attributable to
common stockholders                         |  | $                  | (829   | )                 |  | $      | 703    |      |  | $       | (1,298  | ) |  | $       | (2,215  | )
|                                                                                                                                                 |                                                                               |  |                    |        |                   |  |        |        |      |  |         |         |   |  |         |         |  

See notes to the condensed consolidated financial statements.

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TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 2002 and 2003
All figures $000
(Unaudited)


|                                                                                                |                                                                                         |                                                      |       |                   |         |      |       |          |         |  
|----------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ---------------------------------------------------- | ----- | ----------------- | ------- | ---- | ----- | -------- | ------- | -
|                                                                                                |                                                                                         |                                                      |       | Nine Months Ended
|                                                                                                |                                                                                         |                                                      |       | September 30,    
|                                                                                                |                                                                                         |                                                      |       |                  
|                                                                                                |                                                                                         |                                                      |       | 2002              |         | 2003
|                                                                                                |                                                                                         |                                                      |       |                   |         |     
|Cash flows from operating activities:                                                           |                                                                                         |                                                      |       |                   |         |      |       |         
|                                                                                                | Net income                                                                              |                                                      | $     | 7,254             |         |      | $     | 7,054    |        
|                                                                                                |                                                                                         |                                                      |       |                   |         |      |       |          |        
|Adjustments to reconcile net income to net cash provided by
operating activities:               |                                                                                         |                                                      |       |                   |         |      |       |         
|                                                                                                | Depreciation and amortization                                                           |                                                      |       | 23,768            |         |      |       | 25,535   |        
|                                                                                                | Goodwill impairment write-off                                                           |                                                      |       | 1,301             |         |      |       |         |        
|                                                                                                | Club closure costs                                                                      |                                                      |       | 1,095             |         |      |       |         |        
|                                                                                                | Compensation expense in connection with stock options                                   |                                                      |       | 901               |         |      |       | 207      |        
|                                                                                                | Noncash rental expense, net of noncash rental income                                    |                                                      |       | 1,278             |         |      |       | 1,311    |        
|                                                                                                | Share of net income in affiliated companies                                             |                                                      |       | (523              | )       |      |       | (592     | )      
|                                                                                                | Loss on extinguishment of debt                                                          |                                                      |       |                  |         |      |       | 7,773    |        
|                                                                                                | Amortization of debt issuance costs                                                     |                                                      |       | 1,435             |         |      |       | 1,300    |        
|                                                                                                | Change in certain working capital components                                            |                                                      |       | 9,804             |         |      |       | 12,215   |        
|                                                                                                | Decrease (increase) in deferred tax asset                                               |                                                      |       | (2,485            | )       |      |       | 2,079    |        
|                                                                                                | Decrease (increase) in deferred membership costs                                        |                                                      |       | (418              | )       |      |       | 48       |        
|                                                                                                | Other                                                                                   |                                                      |       | 136               |         |      |       | 542      |        
|                                                                                                |                                                                                         |                                                      |       |                   |         |      |       |         
|                                                                                                |                                                                                         | Total adjustments                                    |       |                   | 36,292  |      |       |          | 50,418  |  
|                                                                                                |                                                                                         |                                                      |       |                   |         |      |       |         
|                                                                                                |                                                                                         | Net cash provided by operating activities            |       |                   | 43,546  |      |       |          | 57,472  |  
|                                                                                                |                                                                                         |                                                      |       |                   |         |      |       |         
|Cash flows from investing activities:                                                           |                                                                                         |                                                      |       |                   |         |      |       |         
|                                                                                                | Capital expenditures, net of effects of acquired
business in 2002                       |                                                      |       | (34,324           | )       |      |       | (29,131  | )      
|                                                                                                | Proceeds from sale of equipment                                                         |                                                      |       |                  |         |      |       | 153      |        
|                                                                                                | Acquisition of business                                                                 |                                                      |       | (348              | )       |      |       |         |        
|                                                                                                | Intangible and other assets                                                             |                                                      |       | 287               |         |      |       |         |        
|                                                                                                | Landlord contributions                                                                  |                                                      |       | 3,467             |         |      |       | 617      |        
|                                                                                                |                                                                                         |                                                      |       |                   |         |      |       |         
|                                                                                                |                                                                                         | Net cash used in investing activities                |       |                   | (30,918 | )    |       |          | (28,361 | )
|                                                                                                |                                                                                         |                                                      |       |                   |         |      |       |         
|Cash flows from financing activities:                                                           |                                                                                         |                                                      |       |                   |         |      |       |         
|                                                                                                | Proceeds from 9 5/8% Senior Note Offering                                               |                                                      |       |                  |         |      |       | 255,000  |        
|                                                                                                | Repayment of 9 3/4% Senior Notes                                                        |                                                      |       |                  |         |      |       | (125,000 | )      
|                                                                                                | Premium paid on extinguishment of debt and other costs                                  |                                                      |       |                  |         |      |       | (4,064   | )      
|                                                                                                | Redemption of redeemable senior preferred stock                                         |                                                      |       |                  |         |      |       | (66,977  | )      
|                                                                                                | Transaction costs related to 9 5/8% Senior Notes                                        |                                                      |       |                  |         |      |       | (9,597   | )      
|                                                                                                | Net line of credit repayment                                                            |                                                      |       | (12,000           | )       |      |       | (14,500  | )      
|                                                                                                | Net subordinated credit (repayments) borrowings                                         |                                                      |       | 2,810             |         |      |       | (9,000   | )      
|                                                                                                | Repurchase of Series B preferred stock                                                  |                                                      |       |                  |         |      |       | (583     | )      
|                                                                                                | Repayments of borrowings                                                                |                                                      |       | (3,833            | )       |      |       | (4,157   | )      
|                                                                                                |                                                                                         |                                                      |       |                   |         |      |       |         
|                                                                                                |                                                                                         | Net cash provided by (used in) financing activities  |       |                   | (13,023 | )    |       |          | 21,122  |  
|                                                                                                |                                                                                         |                                                      |       |                   |         |      |       |         
|                                                                                                |                                                                                         | Net increase (decrease) in cash and cash equivalents |       |                   | (395    | )    |       |          | 50,233  |  
|Cash and cash equivalents at beginning of period                                                |                                                                                         |                                                      | 5,458 |                   |         |      | 5,551 |         
|                                                                                                |                                                                                         |                                                      |       |                   |         |      |       |         
|                                                                                                |                                                                                         | Cash and cash equivalents at end of period           |       | $                 | 5,063   |      |       |          | 55,784  |  
|                                                                                                |                                                                                         |                                                      |       |                   |         |      |       |          |        
|Summary of change in certain working capital components, net
of effects of acquired businesses: |                                                                                         |                                                      |       |                   |         |      |       |         
|                                                                                                | Decrease in accounts receivable                                                         |                                                      |       | 384               |         |      |       | 331      |        
|                                                                                                | Decrease (increase) in inventory                                                        |                                                      |       | (117              | )       |      |       | 345      |        
|                                                                                                | Decrease (increase) in prepaid expenses, prepaid income taxes, and
other current assets |                                                      |       | (999              | )       |      |       | 647      |        
|                                                                                                | Increase in accounts payable and accrued
expenses                                       |                                                      |       | 6,159             |         |      |       | 9,200    |        
|                                                                                                | Increase in deferred revenue                                                            |                                                      |       | 4,377             |         |      |       | 1,692    |        
|                                                                                                |                                                                                         |                                                      |       |                   |         |      |       |         
|                                                                                                |                                                                                         | Net changes in working capital                       |       | $                 | 9,804   |      |       | $        | 12,215  |  
|                                                                                                |                                                                                         |                                                      |       |                   |         |      |       |          |        

|                                                    |                                             |                                                                                                                                        
|--------------------------------------------------- | ------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------
|Supplemental Disclosures of cash flow information: 
|                                                    | Noncash investing and financing activities:
|                                                    |                                             | The Company assumed $445 of long term debt in connection with a club
acquisition during the nine month period ended September 30,
2002.
|                                                    |                                             | The Company acquired $1,889 of club equipment financed by lessors during
the nine month period ended September 30, 2002.               
|See also Note 7 for stock option exercises in 2003.

See notes to the condensed consolidated financial statements.

4



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##### Table of Contents



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and September 30, 2003
(Unaudited)

1. Basis of Presentation

The condensed consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). The condensed consolidated financial
statements should be read in conjunction with the Companys December 31, 2002
consolidated financial statements and notes thereto, included in Form 10-K. The
year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. Certain
information and footnote disclosures which are normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to SEC rules and regulations. The
Company believes that the disclosures made are adequate to make the information
presented not misleading. The information reflects all adjustments which, in
the opinion of Management, are necessary for a fair presentation of the
financial position and results of operations for the interim periods set forth
herein. All such adjustments, except for the cumulative effect of a change in
accounting principle, discontinued operations, and loss on extinguishment of
debt are of a normal and recurring nature. The results for the three and nine
months ended September 30, 2003 are not necessarily indicative of the results
for the entire fiscal year ending December 31, 2003.

2. Long-Term Debt and Capital Lease Obligations

|                                          |  |              |         |               |  |   |         | 
|----------------------------------------- |  | ------------ | ------- | ------------- |  | - | ------- | 
|                                          |  | December 31, |         | September 30,
|                                          |  | 2002         |         | 2003         
|                                          |  |              |         |              
|                                          |  | ($000s)     |         | ($000s)     
|9 3/4% Senior Notes, due 2004             |  | $            | 125,000 |               |  | $ |        | 
|9 5/8% Senior Notes, due 2011             |  |              |        |               |  |   | 255,000 | 
|Line of Credit borrowings                 |  |              | 14,500  |               |  |   |        | 
|Subordinated credit borrowings            |  |              | 9,000   |               |  |   |        | 
|Notes payable for acquired businesses     |  |              | 6,230   |               |  |   | 4,992   | 
|Capital lease obligations                 |  |              | 6,213   |               |  |   | 3,294   | 
|                                          |  |              |         |               |  |   |         | 
|                                          |  |              | 160,943 |               |  |   | 263,286 | 
|Less, Current portion due within one year |  |              | 5,178   |               |  |   | 4,198   | 
|                                          |  |              |         |               |  |   |         | 
|Long-term portion                         |  | $            | 155,765 |               |  | $ | 259,088 | 
|                                          |  |              |         |               |  |   |         | 

On April 16, 2003 the Company successfully completed a refinancing of its
debt. This refinancing included an offering of $255.0 million of 9 5/8% Senior
Notes (Notes) that will mature April 15, 2011, and the entering into of a new
$50.0 million senior secured revolving credit facility (the Senior Credit
Facility) that will expire April 15, 2008. The Notes accrue interest at 9 5/8%
per annum and interest is payable semiannually on April 15, and October 15. The
Company has effected a registration statement with the Securities and Exchange
Commission for notes having substantially identical terms as the Notes as part
of an offer to exchange freely tradable exchange notes for the Notes. In
connection with this refinancing, the Company wrote-off $3.7 million of
deferred financing costs related to extinguished debt, paid a call premium of
$3.0 million and incurred $1.0 million of interest on the 9 3/4% Notes
representing the interest incurred during the 30 day redemption notification
period. The uses of proceeds from the 9 5/8% Note offering were as follows:

|                                                                   |  |          |         | 
|------------------------------------------------------------------ |  | -------- | ------- | 
|                                                                   |  | ($000s)
|                                                                   |  |         
|Redemption of existing 9 3/4% Senior Notes, principal and interest |  | $        | 126,049 | 
|Call premium on existing 9 3/4% Senior Notes                       |  |          | 3,048   | 
|Redemption of senior preferred stock, at liquidation value         |  |          | 66,977  | 
|Repayment of line of credit principal borrowings and interest      |  |          | 4,013   | 
|Repayment of subordinated credit principal borrowings and interest |  |          | 9,060   | 
|Underwriting fees and other closing costs                          |  |          | 9,597   | 
|Available for general corporate purposes                           |  |          | 36,256  | 
|                                                                   |  |          |         | 
|Total use of funds                                                 |  | $        | 255,000 | 
|                                                                   |  |          |         | 

5



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##### Table of Contents



The Senior Credit Facility contains various covenants including limits on
capital expenditures, the maintenance of a consolidated interest coverage ratio
of not less than 2.25:1.00 during 2003, and a maximum permitted total leverage
ratio of 4.00:1.00 during 2003. Loans under the Senior Credit Facility will, at
our option, bear interest at either the banks prime rate plus 3.0% or the
Eurodollar rate plus 4.0%, as defined. There were no borrowings outstanding at
September 30, 2003 and outstanding letters of credit issued totaled $1.8
million. The unutilized portion of the Senior Credit Facility as of September
30, 2003 was $48.2 million.

3. September 11, 2001 Events

The terrorist attacks of September 11, 2001 (the September 11 events),
resulted in a tremendous loss of life and property. Secondarily, those events
have interrupted the operations at four clubs located in downtown Manhattan.
Three of the affected four clubs were back in operation by October 2001, while
the fourth club reopened in September 2002.

The Company carries business interruption insurance to mitigate certain
lost revenue and profits experienced with the September 11 events. In this
regard, the Company received $350,000 in the first quarter of 2002, of which
$175,000 represented reimbursement for costs incurred and $175,000 represented
an on-account payment towards the interruption claim. In the third and fourth
quarters of 2002, on-account payments of $250,000 and $600,000 were received.
In the first quarter of 2003, an on-account payment of $1.3 million was
received, and in July 2003, the Company entered into a settlement agreement
with its insurer resulting in a final settlement payment of $1.5 million. These
on-account and final payments have been classified with fees and other revenues
when received.

4. Goodwill and Other Intangibles

Effective January 1, 2002 the Company implemented the Financial Accounting
Standards Board (FASB) Statement No. 141 Business Combinationsand Statement
No. 142, Goodwill and Other Intangible Assets(SFAS 142). In connection with
the SFAS 142 transition impairment test the Company recorded a $1.3 million
write-off of goodwill in the quarter ended March 31, 2002. A deferred tax
benefit of $612,000 was recorded with this goodwill write-off, resulting in a
net cumulative effect of change in accounting principle of $689,000, in the
first quarter of 2002. The write-off of goodwill related to four, remote
underperforming clubs. The impairment test was performed with discounted
estimated future cash flows as the criteria for determining fair market value.
Goodwill has been allocated to reporting units that closely reflect the regions
served by the four trade names; New York Sports Club, Boston Sports Club,
Washington Sports Club and Philadelphia Sports Club, with certain more remote
clubs that do not benefit from a regional cluster each being considered a
single reporting unit. The Company performed an impairment test in the quarter
ended March 31, 2003 and determined that goodwill was not impaired.

The change in the carrying amount of goodwill from December 31, 2002
through September 30, 2003 is as follows:

|                                |  |   |        | 
|------------------------------- |  | - | ------ | 
|Balance December 31, 2002       |  | $ | 45,531 | 
|Currency translation adjustment |  |   | 132    | 
|                                |  |   |        | 
|Balance September 30, 2003      |  | $ | 45,663 | 
|                                |  |   |        | 

Below is a summary of the Companys acquired intangible assets as of
December 31, 2002 and September 30, 2003.

|                           |  |                         |        |                          |  |                 |         |   |  |   |       | 
|-------------------------- |  | ----------------------- | ------ | ------------------------ |  | --------------- | ------- | - |  | - | ----- | 
|                           |  | As of December 31, 2002
|                           |  | ($000s)               
|                           |  |                        
|Acquired Intangible Assets |  | Gross Carrying Amount   |        | Accumulated Amortization |  | Net Intangibles
|                           |  |                         |        |                          |  |                
|Membership Lists           |  | $                       | 11,054 |                          |  | $               | (9,605  | ) |  | $ | 1,449 | 
|Covenants-not-to-compete   |  |                         | 876    |                          |  |                 | (711    | ) |  |   | 165   | 
|Beneficial Lease           |  |                         | 223    |                          |  |                 | (162    | ) |  |   | 61    | 
|                           |  |                         |        |                          |  |                 |         |   |  |   |       | 
|                           |  | $                       | 12,153 |                          |  | $               | (10,478 | ) |  | $ | 1,675 | 
|                           |  |                         |        |                          |  |                 |         |   |  |   |       | 

|                         |  |                          |        |                          |  |                 |         |   |  |   |     | 
|------------------------ |  | ------------------------ | ------ | ------------------------ |  | --------------- | ------- | - |  | - | --- | 
|                         |  | As of September 30, 2003
|                         |  | ($000s)               
|                         |  |                         
|                         |  | Gross Carrying Amount    |        | Accumulated Amortization |  | Net Intangibles
|                         |  |                          |        |                          |  |                
|Membership Lists         |  | $                        | 10,930 |                          |  | $               | (10,188 | ) |  | $ | 742 | 
|Covenants-not-to-compete |  |                          | 876    |                          |  |                 | (835    | ) |  |   | 41  | 
|Beneficial Lease         |  |                          | 223    |                          |  |                 | (170    | ) |  |   | 53  | 
|                         |  |                          |        |                          |  |                 |         |   |  |   |     | 
|                         |  | $                        | 12,029 |                          |  | $               | (11,193 | ) |  | $ | 836 | 
|                         |  |                          |        |                          |  |                 |         |   |  |   |     | 

6



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The amortization expense of the above acquired intangible assets for each
of the five years ended December 31, 2007 is as follows:

|                               |  |          |       | 
|------------------------------ |  | -------- | ----- | 
|Aggregate Amortization Expense |  | ($000s)
|                               |  |         
|For the year ended 12/31/03(a) |  | $        | 933   | 
|For the year ended 12/31/04    |  |          | 591   | 
|For the year ended 12/31/05    |  |          | 11    | 
|For the year ended 12/31/06    |  |          | 11    | 
|For the year ended 12/31/07    |  |          | 11    | 
|                               |  |          |       | 
|                               |  | $        | 1,557 | 
|                               |  |          |       | 



---



|(a) |  | Amortization expense for the three and nine months ended September 30,
2003 amounted to $225,000 and $721,000 respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------

5. Stock-Based Employee Compensation

For financial reporting purposes, the Company accounts for stock-based
compensation in accordance with the intrinsic value method (APB No. 25). In
accordance with this method, no compensation expense is recognized in the
accompanying financial statements in connection with the awarding of stock
option grants to employees provided that, as of the grant date, all terms
associated with the award are fixed and the fair value of the Companys stock
is not greater than the amount an employee must pay to acquire the stock as
defined; however, to the extent that stock options are granted to employees
with variable terms or if the fair value of the Companys stock as of the
measurement date is greater than the amount an employee must pay to acquire the
stock, then the Company will recognize compensation expense. The fair value of
warrants granted to nonemployees for the provision financing are recorded as
deferred financing costs and amortized into interest expense using the interest
method.

The following table illustrates the effect on net income (loss) attributed
to common stockholders if the Company had applied the fair value recognition
provisions of Financial Accounting Standards Board issued Statement No. 123,
(SFAS 123) Accounting for Stock-Based Compensation, to stock-based employee
compensation.

|                                                                 |                                                                                                                                                 |   |                    |     |                   |   |      |     |      |   |        |      |   |   |       |     |  
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------------ | --- | ----------------- | - | ---- | --- | ---- | - | ------ | ---- | - | - | ----- | --- | -
|                                                                 |                                                                                                                                                 |   | Three Months Ended |     | Nine Months Ended
|                                                                 |                                                                                                                                                 |   | September 30,      |     | September 30,    
|                                                                 |                                                                                                                                                 |   | ($000s)          |     | ($000s)        
|                                                                 |                                                                                                                                                 |   |                    |     |                  
|                                                                 |                                                                                                                                                 |   | 2002               |     | 2003              |   | 2002 |     | 2003
|                                                                 |                                                                                                                                                 |   |                    |     |                   |   |      |     |     
|Net income (loss) attributed to common stockholders, as reported |                                                                                                                                                 | $ | (829               | )   |                   | $ | 703  |     |      | $ | (1,298 | )    |   | $ | 2,215 |    
|Add:                                                             |                                                                                                                                                 |   |                    |     |                   |   |      |     |      |   |        |      |   |   |       |    
|                                                                 | Stock-based employee compensation expense included in reported net
income (loss) attributed to common stockholders, net of related
tax effects  |   |                    | 6   |                   |   |      | 5   |      |   |        | 31   |   |   |       | 16  |  
|Deduct:                                                          |                                                                                                                                                 |   |                    |     |                   |   |      |     |      |   |        |      |   |   |       |    
|                                                                 | Total stock-based employee compensation expense determined under
fair value based method for all stock option awards net of related
tax effects |   |                    | (68 | )                 |   |      | (67 | )    |   |        | (117 | ) |   |       | (88 | )
|                                                                 |                                                                                                                                                 |   |                    |     |                   |   |      |     |      |   |        |      |   |   |       |    
|Pro forma net income (loss) attributed to common stockholders    |                                                                                                                                                 | $ | (891               | )   |                   | $ | 641  |     |      | $ | (1,384 | )    |   | $ | 2,143 |    
|                                                                 |                                                                                                                                                 |   |                    |     |                   |   |      |     |      |   |        |      |   |   |       |    

Since option grants vest over several years and additional grants are
expected in the future, the pro forma results noted above are not likely to be
representative of the effects on future years of the application of the fair
value based method.

In July 2003 44,400 common stock options were granted to certain employees
under the Town Sports International Stock Option Plan. The options have an
exercise price of $144.00, which has been determined by a third party appraiser
to be in excess of the fair value of the underlying common stock on the grant
date. The options fully vest in 10 years and vesting can be accelerated if
certain financial targets, as defined are met.

For the purposes of the above pro forma information, the fair value of
each option granted was estimated on the date of grant using the Black-Scholes
option pricing model. For the years ended December 31, 2000, 2001, and the July
2003 grant, the weighted-average fair value of the option grants were
approximately $47.11, $111.89, and $14.50, respectively. The following
weighted-average assumptions were used in computing the fair value of options
grants: expected volatility of 69% for the year ended December 31, 2000, 72%
for the year ended December 31, 2001, and 55.2% for the July 2003 grants,
risk-free interest rate of approximately 6.6%, 4.6%, and 3.8% for December 31,
2000, 2001 and the July 2003 grants respectively, expected lives of five years
for December 31, 2000 and 2001, and six years for the July 2003 grant, and a
zero divided yield for all periods.

7



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##### Table of Contents



6. Discontinued Operations

In the fourth quarter of 2002, the Company sold or closed two remote
underperforming, wholly-owned clubs. The Company has accounted for these two
clubs as discontinued operations and, accordingly, the results of their
operations have been classified as discontinued in the condensed consolidated
statement of operations, and prior periods have been reclassified in accordance
with the Financial Accounting Standards Board issued Statement No. 144,
Accounting for the Impairment or Disposal of Long-lived Assets. Revenues and
pre-tax losses for these discontinued clubs were $459,000 and $1.2 million
respectively for the three months ended September 30, 2002 and $1.3 million and
$1.4 million respectively for the nine months ended September 30, 2002.
Included in the pre-tax losses are $1.1 million of fixed asset write-offs
related to these club closures.

7. Exercise of Stock Options

In January 2003, an executive officer of the Company exercised 9,530
Series B preferred stock options, and in turn these newly issues shares were
repurchased by the Company for $540,000 and were retired. In addition, the same
officer sold 548 previously held shares of Series B preferred stock back to the
Company for $43,000 which were also retired. In February 2003, several
executives of the Company exercised and converted 148,775 Series B preferred
stock options into 106,267 shares of Series B preferred stock. The difference
between the 148,775 options exercised and the 106,267 shares issued is due to
the remittance of these shares to the Company to cover the purchase price of
the stock. The remitted shares were subsequently retired by the Company. The
executives sold all of Series B preferred stock issued in connection with these
February exercises to an affiliate of Rosewood Capital L.P., a stockholder of
the Company.

8. Contingencies

On February 13, 2003, an individual filed suit against the Company in the
Supreme Court, New York County, alleging that on January 14, 2003, he sustained
an injury at one of the Companys club locations resulting in serious bodily
injury. His complaint seeks $250.0 million in damages for personal injuries, in
addition to $250.0 million of punitive damages. The Company has in force $51.0
million of insurance coverage to cover claims of this nature. The Company
intends to vigorously contest this lawsuit and presently anticipates that these
matters will be covered by insurance.

In addition, the Company is a party to various lawsuits arising in the
normal course of business. Management believes that the ultimate outcome of
these matters will not have a material effect on the Companys consolidated
financial position, results of operations or cash flows.

9. Recent Accounting Pronouncements

In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liability and Equity (SFAS
150), which establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. As of September 30, 2003
the Company does not have financial instruments within the scope of this
pronouncement.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. Interpretation No. 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entitys activities or is
entitled to receive a majority of the entitys residual return or both.
Interpretation No. 46 also provides criteria for determining whether an entity
is a variable interest entity subject to consolidation. Interpretation No.46
requires immediate consolidation of variable interest entities created after
January 31, 2003. For variable interest entities created prior to February 1,
2003, consolidation is required on October 1, 2003. The Company does not
believe the adoption of Interpretation No. 46 will have a material effect on
the consolidated financial statements.

10. Guarantors

The Company and all of its domestic subsidiaries have unconditionally
guaranteed the $255.0 million 9 5/8% Senior Notes. However the Companys
foreign subsidiaries have not provided guarantees for these Senior Notes.

The following schedules set forth condensed consolidating financial
information as required by Rule 3-10 of Securities and Exchange Commission
Regulation S-X for the three and nine month periods ending September 30, 2002
and 2003. The financial information illustrates the composition of the combined
guarantors.

8



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##### Table of Contents



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

All figures in $000
December 31, 2002
(Unaudited)


|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |        |   |          |          |          |   |         |         |         |  
|------------------------------------------------------------------ | --------------------------------------------------------------- | ------------------------------------------------------------------------ | ------- | ------- | ------- | ---------- | ------- | ------------ | ------- | ------------ | ----- | ------------ | ------ | - | -------- | -------- | -------- | - | ------- | ------- | ------- | -
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       | Non-         |        |   |          |          |          |   |         |        
|                                                                   |                                                                 |                                                                          |         |         |         |            |         | Subsidiary   |         | Guarantor    |       |              |        |   |          |          |          |  
|                                                                   |                                                                 |                                                                          |         | Parent  |         | Guarantors |         | Subsidiaries |         | Eliminations |       | Consolidated
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |             
|Assets                                                             |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |        |   |          |          |          |   |         |        
|Current assets:                                                    |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |        |   |          |          |          |   |         |        
|                                                                   | Cash and cash equivalents                                       |                                                                          | $       | 1,575   |         |            | $       | 3,635        |         |              | $     | 341          |        |   | $        |         |          |   | $       | 5,551   |        
|                                                                   | Accounts receivable, net                                        |                                                                          |         | 1,840   |         |            |         | 1,173        |         |              |       | 99           |        |   |          | (1,779   | )        |   |         | 1,333   |        
|                                                                   | Inventory                                                       |                                                                          |         |        |         |            |         | 1,106        |         |              |       | 26           |        |   |          |         |          |   |         | 1,132   |        
|                                                                   | Prepaid corporate income taxes                                  |                                                                          |         | 3,012   |         |            |         |             |         |              |       |             |        |   |          |         |          |   |         | 3,012   |        
|                                                                   | Intercompany receivable (payable)                               |                                                                          |         | (18,996 | )       |            |         | 20,469       |         |              |       | (1,473       | )      |   |          |         |          |   |         |        |        
|                                                                   | Prepaid expenses and other current assets                       |                                                                          |         | 5,837   |         |            |         | 2,093        |         |              |       |             |        |   |          | (3,500   | )        |   |         | 4,430   |        
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |        |   |          |          |          |   |         |        
|                                                                   |                                                                 | Total current assets                                                     |         |         | (6,732  | )          |         |              | 28,476  |              |       |              | (1,007 | ) |          |          | (5,279   | ) |         |         | 15,458  |  
|Investment in subsidiaries                                         |                                                                 |                                                                          | 206,413 |         |         |            |        |              |         |              |      |              |        |   | (206,413 | )        |          |   |        |        
|Fixed assets, net                                                  |                                                                 |                                                                          | 11,273  |         |         |            | 198,050 |              |         |              | 1,500 |              |        |   |         |          |          |   | 210,823 |        
|Goodwill, net                                                      |                                                                 |                                                                          |        |         |         |            | 44,927  |              |         |              | 604   |              |        |   |         |          |          |   | 45,531  |        
|Intangible assets, net                                             |                                                                 |                                                                          |        |         |         |            | 1,569   |              |         |              | 106   |              |        |   |         |          |          |   | 1,675   |        
|Deferred tax assets, net                                           |                                                                 |                                                                          | 20,866  |         |         |            | (490    | )            |         |              | (122  | )            |        |   |         |          |          |   | 20,254  |        
|Deferred membership costs                                          |                                                                 |                                                                          |        |         |         |            | 14,408  |              |         |              |      |              |        |   |         |          |          |   | 14,408  |        
|Other assets                                                       |                                                                 |                                                                          | 5,038   |         |         |            | 1,063   |              |         |              |      |              |        |   |         |          |          |   | 6,101   |        
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |        |   |          |          |          |   |         |        
|                                                                   |                                                                 | Total assets                                                             |         | $       | 236,858 |            |         | $            | 288,003 |              |       | $            | 1,081  |   |          | $        | (211,692 | ) |         | $       | 314,250 |  
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |        |   |          |          |          |   |         |         |        
|Liabilities, Redeemable Preferred Stock, and Stockholders Deficit |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |        |   |          |          |          |   |         |        
|Current liabilities:                                               |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |        |   |          |          |          |   |         |        
|                                                                   | Current portion of long-term debt and
capital lease obligations |                                                                          | $       | 5,178   |         |            | $       |             |         |              | $     |             |        |   | $        |         |          |   | $       | 5,178   |        
|                                                                   | Accounts payable                                                |                                                                          |         | 214     |         |            |         | 5,114        |         |              |       |             |        |   |          |         |          |   |         | 5,328   |        
|                                                                   | Accrued expenses and accrued interest                           |                                                                          |         | 9,470   |         |            |         | 13,398       |         |              |       | 545          |        |   |          | (1,779   | )        |   |         | 21,634  |        
|                                                                   | Deferred revenue                                                |                                                                          |         |        |         |            |         | 26,510       |         |              |       |             |        |   |          |         |          |   |         | 26,510  |        
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |        |   |          |          |          |   |         |        
|                                                                   |                                                                 | Total current liabilities                                                |         |         | 14,862  |            |         |              | 45,022  |              |       |              | 545    |   |          |          | (1,779   | ) |         |         | 58,650  |  
|Long-term debt and capital lease
obligations                       |                                                                 |                                                                          | 155,765 |         |         |            | 3,500   |              |         |              |      |              |        |   | (3,500   | )        |          |   | 155,765 |        
|Deferred lease liabilities                                         |                                                                 |                                                                          | 625     |         |         |            | 23,019  |              |         |              |      |              |        |   |         |          |          |   | 23,644  |        
|Deferred revenue                                                   |                                                                 |                                                                          | 7       |         |         |            | 3,345   |              |         |              | 83    |              |        |   |         |          |          |   | 3,435   |        
|Other liabilities                                                  |                                                                 |                                                                          | 373     |         |         |            | 7,157   |              |         |              |      |              |        |   |         |          |          |   | 7,530   |        
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |        |   |          |          |          |   |         |        
|                                                                   |                                                                 | Total liabilities                                                        |         |         | 171,632 |            |         |              | 82,043  |              |       |              | 628    |   |          |          | (5,279   | ) |         |         | 249,024 |  
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |        |   |          |          |          |   |         |        
|Redeemable Preferred Stock:                                        |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |        |   |          |          |          |   |         |        
|Redeemable senior preferred stock                                  |                                                                 |                                                                          | 62,125  |         |         |            |        |              |         |              |      |              |        |   |         |          |          |   | 62,125  |        
|Series A preferred stock                                           |                                                                 |                                                                          | 34,841  |         |         |            |        |              |         |              |      |              |        |   |         |          |          |   | 34,841  |        
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |        |   |          |          |          |   |         |        
|                                                                   |                                                                 |                                                                          | 96,966  |         |         |            |        |              |         |              |      |              |        |   |         |          |          |   | 96,966  |        
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |        |   |          |          |          |   |         |        
|Stockholders deficit:                                             |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |        |   |          |          |          |   |         |        
|                                                                   | Series B preferred stock                                        |                                                                          |         | 303     |         |            |         |             |         |              |       |             |        |   |          |         |          |   |         | 303     |        
|                                                                   | Common stockholders deficit                                    |                                                                          |         | (32,336 | )       |            |         | 205,960      |         |              |       | 160          |        |   |          | (206,120 | )        |   |         | (32,336 | )      
|                                                                   | Accumulated other comprehensive income                          |                                                                          |         | 293     |         |            |         |             |         |              |       | 293          |        |   |          | (293     | )        |   |         | 293     |        
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |        |   |          |          |          |   |         |        
|                                                                   |                                                                 | Total stockholders deficit                                              |         |         | (31,740 | )          |         |              | 205,960 |              |       |              | 453    |   |          |          | (206,413 | ) |         |         | (31,740 | )
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |        |   |          |          |          |   |         |        
|                                                                   |                                                                 | Total liabilities, redeemable preferred
stock and stockholders deficit: |         | $       | 236,858 |            |         | $            | 288,003 |              |       | $            | 1,081  |   |          | $        | (211,692 | ) |         | $       | 314,250 |  
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |        |   |          |          |          |   |         |         |        

9



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##### Table of Contents



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

All figures in $000
September 30, 2003
(Unaudited)


|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |       |   |          |          |          |   |         |         |         |  
|------------------------------------------------------------------ | --------------------------------------------------------------- | ------------------------------------------------------------------------ | ------- | ------- | ------- | ---------- | ------- | ------------ | ------- | ------------ | ----- | ------------ | ----- | - | -------- | -------- | -------- | - | ------- | ------- | ------- | -
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       | Non-         |       |   |          |          |          |   |         |        
|                                                                   |                                                                 |                                                                          |         |         |         |            |         | Subsidiary   |         | Guarantor    |       |              |       |   |          |          |          |  
|                                                                   |                                                                 |                                                                          |         | Parent  |         | Guarantors |         | Subsidiaries |         | Eliminations |       | Consolidated
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |             
|Assets                                                             |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |       |   |          |          |          |   |         |        
|Current assets:                                                    |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |       |   |          |          |          |   |         |        
|                                                                   | Cash and cash equivalents                                       |                                                                          | $       | 1,051   |         |            | $       | 53,687       |         |              | $     | 1,046        |       |   | $        |         |          |   | $       | 55,784  |        
|                                                                   | Accounts receivable, net                                        |                                                                          |         | 2,089   |         |            |         | 849          |         |              |       | 106          |       |   |          | (2,042   | )        |   |         | 1,002   |        
|                                                                   | Inventory                                                       |                                                                          |         |        |         |            |         | 760          |         |              |       | 27           |       |   |          |         |          |   |         | 787     |        
|                                                                   | Prepaid corporate income taxes                                  |                                                                          |         | 1,571   |         |            |         |             |         |              |       |             |       |   |          |         |          |   |         | 1,571   |        
|                                                                   | Intercompany receivable (payable)                               |                                                                          |         | 16,632  |         |            |         | (14,908      | )       |              |       | (1,724       | )     |   |          |         |          |   |         |        |        
|                                                                   | Prepaid expenses and other current assets                       |                                                                          |         | 6,585   |         |            |         | 2,731        |         |              |       |             |       |   |          | (3,500   | )        |   |         | 5,816   |        
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |       |   |          |          |          |   |         |        
|                                                                   |                                                                 | Total current assets                                                     |         |         | 27,928  |            |         |              | 43,119  |              |       |              | (545  | ) |          |          | (5,542   | ) |         |         | 64,960  |  
|Investment in subsidiaries                                         |                                                                 |                                                                          | 232,109 |         |         |            |        |              |         |              |      |              |       |   | (232,109 | )        |          |   |        |        
|Fixed assets, net                                                  |                                                                 |                                                                          | 12,125  |         |         |            | 201,574 |              |         |              | 1,399 |              |       |   |         |          |          |   | 215,098 |        
|Goodwill, net                                                      |                                                                 |                                                                          |        |         |         |            | 44,907  |              |         |              | 756   |              |       |   |         |          |          |   | 45,663  |        
|Intangible assets, net                                             |                                                                 |                                                                          |        |         |         |            | 849     |              |         |              | (13   | )            |       |   |         |          |          |   | 836     |        
|Deferred tax assets, net                                           |                                                                 |                                                                          | 18,794  |         |         |            | (491    | )            |         |              | (128  | )            |       |   |         |          |          |   | 18,175  |        
|Deferred membership costs                                          |                                                                 |                                                                          |        |         |         |            | 14,360  |              |         |              |      |              |       |   |         |          |          |   | 14,360  |        
|Other assets                                                       |                                                                 |                                                                          | 9,389   |         |         |            | 978     |              |         |              |      |              |       |   |         |          |          |   | 10,367  |        
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |       |   |          |          |          |   |         |        
|                                                                   |                                                                 | Total assets                                                             |         | $       | 300,345 |            |         | $            | 305,296 |              |       | $            | 1,469 |   |          | $        | (237,651 | ) |         | $       | 369,459 |  
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |       |   |          |          |          |   |         |         |        
|Liabilities, Redeemable Preferred Stock, and Stockholders Deficit |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |       |   |          |          |          |   |         |        
|Current liabilities:                                               |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |       |   |          |          |          |   |         |        
|                                                                   | Current portion of long-term debt and capital lease obligations |                                                                          | $       | 4,198   |         |            | $       |             |         |              | $     |             |       |   | $        |         |          |   | $       | 4,198   |        
|                                                                   | Accounts payable                                                |                                                                          |         | 185     |         |            |         | 3,454        |         |              |       |             |       |   |          |         |          |   |         | 3,639   |        
|                                                                   | Accrued interest                                                |                                                                          |         | 11,253  |         |            |         | 2,053        |         |              |       |             |       |   |          | (2,042   | )        |   |         | 11,264  |        
|                                                                   | Accrued expenses                                                |                                                                          |         | 5,994   |         |            |         | 14,867       |         |              |       | 445          |       |   |          |         |          |   |         | 21,306  |        
|                                                                   | Deferred revenue                                                |                                                                          |         |        |         |            |         | 28,068       |         |              |       |             |       |   |          |         |          |   |         | 28,068  |        
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |       |   |          |          |          |   |         |        
|                                                                   |                                                                 | Total current liabilities                                                |         |         | 21,630  |            |         |              | 48,442  |              |       |              | 445   |   |          |          | (2,042   | ) |         |         | 68,475  |  
|Long-term debt and capital lease obligations                       |                                                                 |                                                                          | 272,760 |         |         |            | (10,172 | )            |         |              |      |              |       |   | (3,500   | )        |          |   | 259,088 |        
|Deferred lease liabilities                                         |                                                                 |                                                                          | 579     |         |         |            | 24,786  |              |         |              |      |              |       |   |         |          |          |   | 25,365  |        
|Deferred revenue                                                   |                                                                 |                                                                          | (14     | )       |         |            | 3,496   |              |         |              | 87    |              |       |   |         |          |          |   | 3,569   |        
|Other liabilities                                                  |                                                                 |                                                                          | 356     |         |         |            | 7,572   |              |         |              |      |              |       |   |         |          |          |   | 7,928   |        
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |       |   |          |          |          |   |         |        
|                                                                   |                                                                 | Total liabilities                                                        |         |         | 295,311 |            |         |              | 74,124  |              |       |              | 532   |   |          |          | (5,542   | ) |         |         | 364,425 |  
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |       |   |          |          |          |   |         |        
|Redeemable Preferred Stock:                                        |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |       |   |          |          |          |   |         |        
|Series A preferred stock                                           |                                                                 |                                                                          | 38,585  |         |         |            |        |              |         |              |      |              |       |   |         |          |          |   | 38,585  |        
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |       |   |          |          |          |   |         |        
|Stockholders deficit:                                             |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |       |   |          |          |          |   |         |        
|                                                                   | Series B preferred stock                                        |                                                                          |         | 9,636   |         |            |         |             |         |              |       |             |       |   |          |         |          |   |         | 9,636   |        
|                                                                   | Common stockholders deficit                                    |                                                                          |         | (43,587 | )       |            |         | 231,172      |         |              |       | 537          |       |   |          | (231,709 | )        |   |         | (43,587 | )      
|                                                                   | Accumulated other comprehensive income                          |                                                                          |         | 400     |         |            |         |             |         |              |       | 400          |       |   |          | (400     | )        |   |         | 400     |        
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |       |   |          |          |          |   |         |        
|                                                                   |                                                                 | Total stockholders deficit                                              |         |         | (33,551 | )          |         |              | 231,172 |              |       |              | 937   |   |          |          | (232,109 | ) |         |         | (33,551 | )
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |       |   |          |          |          |   |         |        
|                                                                   |                                                                 | Total liabilities, redeemable preferred
stock and stockholders deficit: |         | $       | 300,345 |            |         | $            | 305,296 |              |       | $            | 1,469 |   |          | $        | (237,651 | ) |         | $       | 369,459 |  
|                                                                   |                                                                 |                                                                          |         |         |         |            |         |              |         |              |       |              |       |   |          |          |          |   |         |         |        

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##### Table of Contents



TOWN SPORTS INTERNATIONAL, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

All figures in $000
For the three months ended September 30, 2003
(Unaudited)


|                                     |                                                    |   |        |         |            |   |              |        |              |   |              |       |  |   |        |        |   |   |        |        | 
|------------------------------------ | -------------------------------------------------- | - | ------ | ------- | ---------- | - | ------------ | ------ | ------------ | - | ------------ | ----- |  | - | ------ | ------ | - | - | ------ | ------ | 
|                                     |                                                    |   |        |         |            |   |              |        |              |   | Non-         |       |  |   |        |        |   |   |       
|                                     |                                                    |   |        |         |            |   | Subsidiary   |        | Guarantor    |   |              |       |  |   |        |        |  
|                                     |                                                    |   | Parent |         | Guarantors |   | Subsidiaries |        | Eliminations |   | Consolidated
|                                     |                                                    |   |        |         |            |   |              |        |              |   |             
|Revenues:                            |                                                    |   |        |         |            |   |              |        |              |   |              |       |  |   |        |        |   |   |        |       
|                                     | Club operations                                    |   | $      | 44      |            |   | $            | 83,319 |              |   | $            | 1,073 |  |   | $      |       |   |   | $      | 84,436 | 
|                                     | Fees and other                                     |   |        | 1,825   |            |   |              | 1,521  |              |   |              |      |  |   |        | (1,011 | ) |   |        | 2,335  | 
|                                     |                                                    |   |        |         |            |   |              |        |              |   |              |       |  |   |        |        |   |   |        |       
|                                     |                                                    | $ | 1,869  |         |            | $ | 84,840       |        |              | $ | 1,073        |       |  | $ | (1,011 | )      |   | $ | 86,771 |       
|                                     |                                                    |   |        |         |            |   |              |        |              |   |              |       |  |   |        |        |   |   |        |        | 
|Operating expenses:                  |                                                    |   |        |         |            |   |              |        |              |   |              |       |  |   |        |        |   |   |        |       
|                                     | Payroll and related                                |   |        | 5,553   |            |   |              | 26,666 |              |   |              | 428   |  |   |        |       |   |   |        | 32,647 | 
|                                     | Club operating                                     |   |        | 448     |            |   |              | 28,926 |              |   |              | 258   |  |   |        | (871   | ) |   |        | 28,761 | 
|                                     | General and administrative                         |   |        |        |            |   |              | 5,714  |              |   |              | 103   |  |   |        | (140   | ) |   |        | 5,677  | 
|                                     | Depreciation and amortization                      |   |        | 1,098   |            |   |              | 7,596  |              |   |              | 88    |  |   |        |       |   |   |        | 8,782  | 
|                                     |                                                    |   |        |         |            |   |              |        |              |   |              |       |  |   |        |        |   |   |        |       
|                                     |                                                    | $ | 7,099  |         |            | $ | 68,902       |        |              | $ | 877          |       |  | $ | (1,011 | )      |   | $ | 75,867 |       
|                                     |                                                    |   |        |         |            |   |              |        |              |   |              |       |  |   |        |        |   |   |        |        | 
|                                     | Operating income                                   |   |        | (5,230  | )          |   |              | 15,938 |              |   |              | 196   |  |   |        |       |   |   |        | 10,904 | 
|Interest expense                     |                                                    |   | 6,672  |         |            |   | 88           |        |              |   |             |       |  |   |       |        |   |   | 6,760  |       
|Interest income                      |                                                    |   | (179   | )       |            |   |             |        |              |   |             |       |  |   |       |        |   |   | (179   | )     
|                                     |                                                    |   |        |         |            |   |              |        |              |   |              |       |  |   |        |        |   |   |        |       
|                                     | Income before provision for
corporate income taxes |   |        | (11,723 | )          |   |              | 15,850 |              |   |              | 196   |  |   |        |       |   |   |        | 4,323  | 
|Provision for corporate income
taxes |                                                    |   | (5,919 | )       |            |   | 7,850        |        |              |   | 58           |       |  |   |       |        |   |   | 1,989  |       
|                                     |                                                    |   |        |         |            |   |              |        |              |   |              |       |  |   |        |        |   |   |        |       
|                                     | Income before Equity earnings                      |   | $      | (5,804  | )          |   | $            | 8,000  |              |   | $            | 138   |  |   | $      |       |   |   | $      | 2,334  | 
|Equity earnings from subsidiaries    |                                                    |   | 8,138  |         |            |   |             |        |              |   |             |       |  |   | (8,138 | )      |   |   |       |       
|                                     |                                                    |   |        |         |            |   |              |        |              |   |              |       |  |   |        |        |   |   |        |       
|                                     | Net Income                                         |   | $      | 2,334   |            |   | $            | 8,000  |              |   | $            | 138   |  |   | $      | (8,138 | ) |   | $      | 2,334  | 
|                                     |                                                    |   |        |         |            |   |              |        |              |   |              |       |  |   |        |        |   |   |        |        | 

11



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##### Table of Contents



TOWN SPORTS INTERNATIONAL, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

All figures in $000
For the three months ended September 30, 2002
(Unaudited)


|                                     |                                                                               |  |        |        |            |  |              |        |              |  |              |     |  |  |        |        |   |  |        |        |  
|------------------------------------ | ----------------------------------------------------------------------------- |  | ------ | ------ | ---------- |  | ------------ | ------ | ------------ |  | ------------ | --- |  |  | ------ | ------ | - |  | ------ | ------ | -
|                                     |                                                                               |  |        |        |            |  |              |        |              |  | Non-         |     |  |  |        |        |   |  |       
|                                     |                                                                               |  |        |        |            |  | Subsidiary   |        | Guarantor    |  |              |     |  |  |        |        |  
|                                     |                                                                               |  | Parent |        | Guarantors |  | Subsidiaries |        | Eliminations |  | Consolidated
|                                     |                                                                               |  |        |        |            |  |              |        |              |  |             
|Revenues:                            |                                                                               |  |        |        |            |  |              |        |              |  |              |     |  |  |        |        |   |  |        |       
|                                     | Club operations                                                               |  | $      | 161    |            |  | $            | 79,086 |              |  | $            | 972 |  |  | $      |       |   |  | $      | 80,219 |  
|                                     | Fees and other                                                                |  |        | 536    |            |  |              | 1,649  |              |  |              |    |  |  |        | (1,092 | ) |  |        | 1,093  |  
|                                     |                                                                               |  |        |        |            |  |              |        |              |  |              |     |  |  |        |        |   |  |        |       
|                                     |                                                                               |  | 697    |        |            |  | 80,735       |        |              |  | 972          |     |  |  | (1,092 | )      |   |  | 81,312 |       
|                                     |                                                                               |  |        |        |            |  |              |        |              |  |              |     |  |  |        |        |   |  |        |       
|Operating expenses:                  |                                                                               |  |        |        |            |  |              |        |              |  |              |     |  |  |        |        |   |  |        |       
|                                     | Payroll and related                                                           |  |        | 5,439  |            |  |              | 26,790 |              |  |              | 388 |  |  |        |       |   |  |        | 32,617 |  
|                                     | Club operating                                                                |  |        | 102    |            |  |              | 26,793 |              |  |              | 245 |  |  |        | (951   | ) |  |        | 26,189 |  
|                                     | General and administrative                                                    |  |        | (320   | )          |  |              | 5,369  |              |  |              | 87  |  |  |        | (141   | ) |  |        | 4,995  |  
|                                     | Depreciation and amortization                                                 |  |        | 759    |            |  |              | 6,910  |              |  |              | 83  |  |  |        |       |   |  |        | 7,752  |  
|                                     |                                                                               |  |        |        |            |  |              |        |              |  |              |     |  |  |        |        |   |  |        |       
|                                     |                                                                               |  | 5,980  |        |            |  | 65,862       |        |              |  | 803          |     |  |  | (1,092 | )      |   |  | 71,553 |       
|                                     |                                                                               |  |        |        |            |  |              |        |              |  |              |     |  |  |        |        |   |  |        |       
|                                     | Operating income                                                              |  |        | (5,283 | )          |  |              | 14,873 |              |  |              | 169 |  |  |        |       |   |  |        | 9,759  |  
|Interest expense                     |                                                                               |  | 4,109  |        |            |  | 91           |        |              |  |             |     |  |  | (88    | )      |   |  | 4,112  |       
|Interest income                      |                                                                               |  | (126   | )      |            |  |             |        |              |  |             |     |  |  | 88     |        |   |  | (38    | )     
|                                     |                                                                               |  |        |        |            |  |              |        |              |  |              |     |  |  |        |        |   |  |        |       
|                                     | Income from continuing operations
before provision for corporate
income taxes |  |        | (9,266 | )          |  |              | 14,782 |              |  |              | 169 |  |  |        |       |   |  |        | 5,685  |  
|Provision for corporate income
taxes |                                                                               |  | (4,648 | )      |            |  | 7,458        |        |              |  | 36           |     |  |  |       |        |   |  | 2,846  |       
|                                     |                                                                               |  |        |        |            |  |              |        |              |  |              |     |  |  |        |        |   |  |        |       
|                                     | Income from continuing operations                                             |  |        | (4,618 | )          |  |              | 7,324  |              |  |              | 133 |  |  |        |       |   |  |        | 2,839  |  
|Equity earnings from subsidiaries    |                                                                               |  | 7,457  |        |            |  |              |        |              |  |             |     |  |  | (7,457 | )      |   |  |       |       
|                                     | Loss on discontinued operations,
net of income tax benefit                    |  |        | (710   | )          |  |              | (710   | )            |  |              |    |  |  |        | 710    |   |  |        | (710   | )
|                                     |                                                                               |  |        |        |            |  |              |        |              |  |              |     |  |  |        |        |   |  |        |       
|                                     | Net Income                                                                    |  | $      | 2,129  |            |  | $            | 6,614  |              |  | $            | 133 |  |  | $      | (6,747 | ) |  | $      | 2,129  |  
|                                     |                                                                               |  |        |        |            |  |              |        |              |  |              |     |  |  |        |        |   |  |        |        |  

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##### Table of Contents



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

All figures in $000
For the nine months ended September 30, 2003
(Unaudited)


|                                     |                                                    |  |         |         |            |  |              |         |              |  |              |       |  |  |        |         |   |  |         |         | 
|------------------------------------ | -------------------------------------------------- |  | ------- | ------- | ---------- |  | ------------ | ------- | ------------ |  | ------------ | ----- |  |  | ------ | ------- | - |  | ------- | ------- | 
|                                     |                                                    |  |         |         |            |  |              |         |              |  | Non-         |       |  |  |        |         |   |  |        
|                                     |                                                    |  |         |         |            |  | Subsidiary   |         | Guarantor    |  |              |       |  |  |        |         |  
|                                     |                                                    |  | Parent  |         | Guarantors |  | Subsidiaries |         | Eliminations |  | Consolidated
|                                     |                                                    |  |         |         |            |  |              |         |              |  |             
|Revenues:                            |                                                    |  |         |         |            |  |              |         |              |  |              |       |  |  |        |         |   |  |         |        
|                                     | Club operations                                    |  | $       | 98      |            |  | $            | 250,707 |              |  | $            | 3,414 |  |  | $      |        |   |  | $       | 254,219 | 
|                                     | Fees and other                                     |  |         | 3,691   |            |  |              | 4,908   |              |  |              |      |  |  |        | (3,088  | ) |  |         | 5,511   | 
|                                     |                                                    |  |         |         |            |  |              |         |              |  |              |       |  |  |        |         |   |  |         |        
|                                     |                                                    |  | 3,789   |         |            |  | 255,615      |         |              |  | 3,414        |       |  |  | (3,088 | )       |   |  | 259,730 |        
|                                     |                                                    |  |         |         |            |  |              |         |              |  |              |       |  |  |        |         |   |  |         |        
|Operating expenses:                  |                                                    |  |         |         |            |  |              |         |              |  |              |       |  |  |        |         |   |  |         |        
|                                     | Payroll and related                                |  |         | 16,718  |            |  |              | 80,628  |              |  |              | 1,277 |  |  |        |        |   |  |         | 98,623  | 
|                                     | Club operating                                     |  |         | (1,058  | )          |  |              | 85,048  |              |  |              | 793   |  |  |        | (2,668  | ) |  |         | 82,115  | 
|                                     | General and administrative                         |  |         | (679    | )          |  |              | 16,717  |              |  |              | 299   |  |  |        | (420    | ) |  |         | 15,917  | 
|                                     | Depreciation and amortization                      |  |         | 2,862   |            |  |              | 22,404  |              |  |              | 269   |  |  |        |        |   |  |         | 25,535  | 
|                                     |                                                    |  |         |         |            |  |              |         |              |  |              |       |  |  |        |         |   |  |         |        
|                                     |                                                    |  | 17,843  |         |            |  | 204,797      |         |              |  | 2,638        |       |  |  | (3,088 | )       |   |  | 222,190 |        
|                                     |                                                    |  |         |         |            |  |              |         |              |  |              |       |  |  |        |         |   |  |         |        
|                                     | Operating income                                   |  |         | (14,054 | )          |  |              | 50,818  |              |  |              | 776   |  |  |        |        |   |  |         | 37,540  | 
|Loss on extinguishment of debt       |                                                    |  | 7,773   |         |            |  |             |         |              |  |             |       |  |  |       |         |   |  | 7,773   |        
|Interest expense                     |                                                    |  | 17,117  |         |            |  | 164          |         |              |  |             |       |  |  | (175   | )       |   |  | 17,106  |        
|Interest income                      |                                                    |  | (572    | )       |            |  |             |         |              |  |             |       |  |  | 175    |         |   |  | (397    | )      
|                                     |                                                    |  |         |         |            |  |              |         |              |  |              |       |  |  |        |         |   |  |         |        
|                                     | Income before provision for corporate income taxes |  |         | (38,372 | )          |  |              | 50,654  |              |  |              | 776   |  |  |        |        |   |  |         | 13,058  | 
|Provision for corporate income taxes |                                                    |  | (18,982 | )       |            |  | 24,782       |         |              |  | 204          |       |  |  |       |         |   |  | 6,004   |        
|                                     |                                                    |  |         |         |            |  |              |         |              |  |              |       |  |  |        |         |   |  |         |        
|                                     | Income from operations before equity earnings      |  |         | (19,390 | )          |  |              | 25,872  |              |  |              | 572   |  |  |        |        |   |  |         | 7,054   | 
|                                     | Equity earnings from subsidiaries                  |  |         | 26,444  |            |  |              |        |              |  |              |      |  |  |        | (26,444 | ) |  |         |        | 
|                                     |                                                    |  |         |         |            |  |              |         |              |  |              |       |  |  |        |         |   |  |         |        
|                                     | Net income                                         |  | $       | 7,054   |            |  | $            | 25,872  |              |  | $            | 572   |  |  | $      | (26,444 | ) |  | $       | 7,054   | 
|                                     |                                                    |  |         |         |            |  |              |         |              |  |              |       |  |  |        |         |   |  |         |         | 

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##### Table of Contents



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

All figures in $000
For the nine months ended September 30, 2002
(Unaudited)


|                                                                                         |                                                                               |  |         |         |            |  |              |         |              |  |              |       |  |  |         |         |   |  |         |         | 
|---------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- |  | ------- | ------- | ---------- |  | ------------ | ------- | ------------ |  | ------------ | ----- |  |  | ------- | ------- | - |  | ------- | ------- | 
|                                                                                         |                                                                               |  |         |         |            |  |              |         |              |  | Non-         |       |  |  |         |         |   |  |        
|                                                                                         |                                                                               |  |         |         |            |  | Subsidiary   |         | Guarantor    |  |              |       |  |  |         |         |  
|                                                                                         |                                                                               |  | Parent  |         | Guarantors |  | Subsidiaries |         | Eliminations |  | Consolidated
|                                                                                         |                                                                               |  |         |         |            |  |              |         |              |  |             
|Revenues:                                                                                |                                                                               |  |         |         |            |  |              |         |              |  |              |       |  |  |         |         |   |  |         |        
|                                                                                         | Club operations                                                               |  | $       | 207     |            |  | $            | 232,299 |              |  | $            | 2,752 |  |  | $       |        |   |  | $       | 235,258 | 
|                                                                                         | Fees and other                                                                |  |         | 1,294   |            |  |              | 4,642   |              |  |              |      |  |  |         | (3,001  | ) |  |         | 2,935   | 
|                                                                                         |                                                                               |  |         |         |            |  |              |         |              |  |              |       |  |  |         |         |   |  |         |        
|                                                                                         |                                                                               |  | 1,501   |         |            |  | 236,941      |         |              |  | 2,752        |       |  |  | (3,001  | )       |   |  | 238,193 |        
|                                                                                         |                                                                               |  |         |         |            |  |              |         |              |  |              |       |  |  |         |         |   |  |         |        
|Operating expenses:                                                                      |                                                                               |  |         |         |            |  |              |         |              |  |              |       |  |  |         |         |   |  |         |        
|                                                                                         | Payroll and related                                                           |  |         | 16,179  |            |  |              | 79,310  |              |  |              | 1,090 |  |  |         |        |   |  |         | 96,579  | 
|                                                                                         | Club operating                                                                |  |         | 374     |            |  |              | 75,736  |              |  |              | 688   |  |  |         | (2,580  | ) |  |         | 74,218  | 
|                                                                                         | General and administrative                                                    |  |         | (755    | )          |  |              | 15,718  |              |  |              | 257   |  |  |         | (421    | ) |  |         | 14,799  | 
|                                                                                         | Depreciation and amortization                                                 |  |         | 2,053   |            |  |              | 21,134  |              |  |              | 299   |  |  |         |        |   |  |         | 23,486  | 
|                                                                                         |                                                                               |  |         |         |            |  |              |         |              |  |              |       |  |  |         |         |   |  |         |        
|                                                                                         |                                                                               |  | 17,851  |         |            |  | 191,898      |         |              |  | 2,334        |       |  |  | (3,001  | )       |   |  | 209,082 |        
|                                                                                         |                                                                               |  |         |         |            |  |              |         |              |  |              |       |  |  |         |         |   |  |         |        
|                                                                                         | Operating income                                                              |  |         | (16,350 | )          |  |              | 45,043  |              |  |              | 418   |  |  |         |        |   |  |         | 29,111  | 
|Interest expense                                                                         |                                                                               |  | 12,388  |         |            |  | 266          |         |              |  | 7            |       |  |  | (263    | )       |   |  | 12,398  |        
|Interest income                                                                          |                                                                               |  | (379    | )       |            |  |             |         |              |  |             |       |  |  | 263     |         |   |  | (116    | )      
|                                                                                         |                                                                               |  |         |         |            |  |              |         |              |  |              |       |  |  |         |         |   |  |         |        
|                                                                                         | Income from continuing operations before provision for
corporate income taxes |  |         | (28,359 | )          |  |              | 44,777  |              |  |              | 411   |  |  |         |        |   |  |         | 16,829  | 
|Provision for corporate income taxes                                                     |                                                                               |  | (13,582 | )       |            |  | 21,550       |         |              |  | 92           |       |  |  |        |         |   |  | 8,060   |        
|                                                                                         |                                                                               |  |         |         |            |  |              |         |              |  |              |       |  |  |         |         |   |  |         |        
|                                                                                         | Income from continuing operations                                             |  |         | (14,777 | )          |  |              | 23,227  |              |  |              | 319   |  |  |         |        |   |  |         | 8,769   | 
|Equity earnings from subsidiaries                                                        |                                                                               |  | 23,546  |         |            |  |             |         |              |  |             |       |  |  | (23,546 | )       |   |  |        |        
|Loss on discontinued operations, net
of income tax benefit of $48                        |                                                                               |  | (826    | )       |            |  | (826         | )       |              |  |             |       |  |  | 826     |         |   |  | (826    | )      
|Cumulative effect of a change in accounting principle, net of
income tax benefit of $612 |                                                                               |  | (689    | )       |            |  | (689         | )       |              |  |             |       |  |  | 689     |         |   |  | (689    | )      
|                                                                                         |                                                                               |  |         |         |            |  |              |         |              |  |              |       |  |  |         |         |   |  |         |        
|                                                                                         | Net income                                                                    |  | $       | 7,254   |            |  | $            | 21,712  |              |  | $            | 319   |  |  | $       | (22,031 | ) |  | $       | 7,254   | 
|                                                                                         |                                                                               |  |         |         |            |  |              |         |              |  |              |       |  |  |         |         |   |  |         |         | 

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##### Table of Contents



TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

All figures in $000
For the nine months ended September 30, 2003
(Unaudited)


|                                                                                  |                                                       |                   |        |         |        |            |         |              |        |              |       |              |     |   |   |         |        |   |         |        |        | 
|--------------------------------------------------------------------------------- | ----------------------------------------------------- | ----------------- | ------ | ------- | ------ | ---------- | ------- | ------------ | ------ | ------------ | ----- | ------------ | --- | - | - | ------- | ------ | - | ------- | ------ | ------ | 
|                                                                                  |                                                       |                   |        |         |        |            |         |              |        |              |       | Non-         |     |   |   |         |        |   |         |       
|                                                                                  |                                                       |                   |        |         |        |            |         | Subsidiary   |        | Guarantor    |       |              |     |   |   |         |        |  
|                                                                                  |                                                       |                   |        | Parent  |        | Guarantors |         | Subsidiaries |        | Eliminations |       | Consolidated
|                                                                                  |                                                       |                   |        |         |        |            |         |              |        |              |       |             
|Cash flows from operating activities:                                             |                                                       |                   |        |         |        |            |         |              |        |              |       |              |     |   |   |         |        |   |         |       
|                                                                                  | Net income                                            |                   | $      | 7,054   |        |            | $       | 25,872       |        |              | $     | 572          |     |   | $ | (26,444 | )      |   | $       | 7,054  |       
|                                                                                  |                                                       |                   |        |         |        |            |         |              |        |              |       |              |     |   |   |         |        |   |         |        |       
|Adjustments to reconcile net income to
net cash provided by operating
activities: |                                                       |                   |        |         |        |            |         |              |        |              |       |              |     |   |   |         |        |   |         |       
|                                                                                  | Depreciation and amortization                         |                   |        | 2,862   |        |            |         | 22,404       |        |              |       | 269          |     |   |   |        |        |   |         | 25,535 |       
|                                                                                  | Compensation expense in connection with stock options |                   |        | 207     |        |            |         |             |        |              |       |             |     |   |   |        |        |   |         | 207    |       
|                                                                                  | Noncash rental expense, net of noncash rental income  |                   |        | (62     | )      |            |         | 1,373        |        |              |       |             |     |   |   |        |        |   |         | 1,311  |       
|                                                                                  | Loss on extinguishment of debt                        |                   |        | 7,773   |        |            |         |             |        |              |       |             |     |   |   |        |        |   |         | 7,773  |       
|                                                                                  | Share of net income in affiliated companies           |                   |        | (592    | )      |            |         |             |        |              |       |             |     |   |   |        |        |   |         | (592   | )     
|                                                                                  | Amortization of debt issuance costs                   |                   |        | 1,300   |        |            |         |             |        |              |       |             |     |   |   |        |        |   |         | 1,300  |       
|                                                                                  | Changes in operating assets and liabilities           |                   |        | 10,840  |        |            |         | 3,604        |        |              |       | (102         | )   |   |   |        |        |   |         | 14,342 |       
|                                                                                  | Other (including equity earnings)                     |                   |        | (26,431 | )      |            |         | 421          |        |              |       | 108          |     |   |   | 26,444  |        |   |         | 542    |       
|                                                                                  |                                                       |                   |        |         |        |            |         |              |        |              |       |              |     |   |   |         |        |   |         |       
|                                                                                  |                                                       | Total adjustments |        |         | (4,103 | )          |         |              | 27,802 |              |       |              | 275 |   |   |         | 26,444 |   |         |        | 50,418 | 
|                                                                                  |                                                       |                   |        |         |        |            |         |              |        |              |       |              |     |   |   |         |        |   |         |       
|Net cash provided by operating activities                                         |                                                       |                   | 2,951  |         |        |            | 53,674  |              |        |              | 847   |              |     |   |  |         |        |   | 57,472  |       
|Net cash used in investing activities                                             |                                                       |                   | (3,713 | )       |        |            | (24,480 | )            |        |              | (168  | )            |     |   |  |         |        |   | (28,361 | )     
|Net cash provided by financing activities                                         |                                                       |                   | 238    |         |        |            | 20,858  |              |        |              | 26    |              |     |   |  |         |        |   | 21,122  |       
|                                                                                  |                                                       |                   |        |         |        |            |         |              |        |              |       |              |     |   |   |         |        |   |         |       
|Net change in cash and cash equivalents                                           |                                                       |                   | (524   | )       |        |            | 50,052  |              |        |              | 705   |              |     |   |  |         |        |   | 50,233  |       
|Cash and cash equivalents at beginning of period                                  |                                                       |                   | 1,575  |         |        |            | 3,635   |              |        |              | 341   |              |     |   |  |         |        |   | 5,551   |       
|                                                                                  |                                                       |                   |        |         |        |            |         |              |        |              |       |              |     |   |   |         |        |   |         |       
|Cash and cash equivalents at end of period                                        |                                                       | $                 | 1,051  |         |        | $          | 53,687  |              |        | $            | 1,046 |              |     | $ |  |         |        | $ | 55,784  |       
|                                                                                  |                                                       |                   |        |         |        |            |         |              |        |              |       |              |     |   |   |         |        |   |         |        |       

15



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##### Table of Contents



TOWN SPORTS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

All figures in $000
For the nine months ended September 30, 2002
(Unaudited)


|                                                                                  |                                                       |                   |         |         |         |            |         |              |        |              |      |              |     |   |   |         |        |   |         |        |        | 
|--------------------------------------------------------------------------------- | ----------------------------------------------------- | ----------------- | ------- | ------- | ------- | ---------- | ------- | ------------ | ------ | ------------ | ---- | ------------ | --- | - | - | ------- | ------ | - | ------- | ------ | ------ | 
|                                                                                  |                                                       |                   |         |         |         |            |         |              |        |              |      | Non-         |     |   |   |         |        |   |         |       
|                                                                                  |                                                       |                   |         |         |         |            |         | Subsidiary   |        | Guarantor    |      |              |     |   |   |         |        |  
|                                                                                  |                                                       |                   |         | Parent  |         | Guarantors |         | Subsidiaries |        | Eliminations |      | Consolidated
|                                                                                  |                                                       |                   |         |         |         |            |         |              |        |              |      |             
|Cash flows from operating activities:                                             |                                                       |                   |         |         |         |            |         |              |        |              |      |              |     |   |   |         |        |   |         |       
|                                                                                  | Net income                                            |                   | $       | 7,254   |         |            | $       | 21,712       |        |              | $    | 319          |     |   | $ | (22,031 | )      |   | $       | 7,254  |       
|                                                                                  |                                                       |                   |         |         |         |            |         |              |        |              |      |              |     |   |   |         |        |   |         |        |       
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                       |                   |         |         |         |            |         |              |        |              |      |              |     |   |   |         |        |   |         |       
|                                                                                  | Depreciation and amortization                         |                   |         | 2,053   |         |            |         | 21,416       |        |              |      | 299          |     |   |   |        |        |   |         | 23,768 |       
|                                                                                  | Goodwill impairment write-off and club closure costs  |                   |         |        |         |            |         | 2,396        |        |              |      |             |     |   |   |        |        |   |         | 2,396  |       
|                                                                                  | Compensation expense in connection with stock options |                   |         | 901     |         |            |         |             |        |              |      |             |     |   |   |        |        |   |         | 901    |       
|                                                                                  | Noncash rental expense, net of noncash rental income  |                   |         | (45     | )       |            |         | 1,323        |        |              |      |             |     |   |   |        |        |   |         | 1,278  |       
|                                                                                  | Share of net income in affiliated
companies           |                   |         | (523    | )       |            |         |             |        |              |      |             |     |   |   |        |        |   |         | (523   | )     
|                                                                                  | Amortization of debt issuance costs                   |                   |         | 1,435   |         |            |         |             |        |              |      |             |     |   |   |        |        |   |         | 1,435  |       
|                                                                                  | Change in operating assets and liabilities            |                   |         | 778     |         |            |         | 6,020        |        |              |      | 103          |     |   |   |        |        |   |         | 6,901  |       
|                                                                                  | Other (including equity earnings)                     |                   |         | (22,061 | )       |            |         | (3           | )      |              |      | 169          |     |   |   | 22,031  |        |   |         | 136    |       
|                                                                                  |                                                       |                   |         |         |         |            |         |              |        |              |      |              |     |   |   |         |        |   |         |       
|                                                                                  |                                                       | Total adjustments |         |         | (17,462 | )          |         |              | 31,152 |              |      |              | 571 |   |   |         | 22,031 |   |         |        | 36,292 | 
|                                                                                  |                                                       |                   |         |         |         |            |         |              |        |              |      |              |     |   |   |         |        |   |         |       
|Net cash provided by operating activities                                         |                                                       |                   | (10,208 | )       |         |            | 52,864  |              |        |              | 890  |              |     |   |  |         |        |   | 43,546  |       
|Net cash used in investing activities                                             |                                                       |                   | (2,516  | )       |         |            | (28,067 | )            |        |              | (335 | )            |     |   |  |         |        |   | (30,918 | )     
|Net cash used in financing activities                                             |                                                       |                   | 12,591  |         |         |            | (25,262 | )            |        |              | (352 | )            |     |   |  |         |        |   | (13,023 | )     
|                                                                                  |                                                       |                   |         |         |         |            |         |              |        |              |      |              |     |   |   |         |        |   |         |       
|Net decrease in cash and cash equivalents                                         |                                                       |                   | (133    | )       |         |            | (465    | )            |        |              | 203  |              |     |   |  |         |        |   | (395    | )     
|Cash and cash equivalents at beginning of period                                  |                                                       |                   | 190     |         |         |            | 5,192   |              |        |              | 76   |              |     |   |  |         |        |   | 5,458   |       
|                                                                                  |                                                       |                   |         |         |         |            |         |              |        |              |      |              |     |   |   |         |        |   |         |       
|Cash and cash equivalents at end of period                                        |                                                       | $                 | 57      |         |         | $          | 4,727   |              |        | $            | 279  |              |     | $ |  |         |        | $ | 5,063   |       
|                                                                                  |                                                       |                   |         |         |         |            |         |              |        |              |      |              |     |   |   |         |        |   |         |        |       

16



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##### Table of Contents






Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations

Introduction

We are one of the two leading owners and operators of fitness clubs in the
Northeast and Mid-Atlantic regions of the United States. As of September 30,
2003, we operated 129 clubs that collectively served approximately 353,000
members. We develop clusters of clubs to serve densely populated major
metropolitan regions in which a high percentage of the population commutes to
work. We service such populations by clustering clubs near the highest
concentrations of our target customers areas of both employment and residence.
Our target customer is college-educated, typically between the ages of 21 and
50 and earns an annual income of between $50,000 and $150,000.

Our goal is to develop the premier health club network in each of the
major metropolitan regions we enter. We believe that clustering clubs allows us
to achieve strategic operating advantages that enhance our ability to achieve
this goal. In entering new regions, we develop these clusters by initially
opening or acquiring clubs located in the more central urban markets of the
region and then branching out from these urban centers to suburban commuter
communities. Capitalizing on this clustering of clubs, as of September 30,
2003, approximately 50% of our members participated in a membership plan that
allows unlimited access to all of our clubs for a higher membership fee.

We have executed this strategy successfully in the New York region through
the network of clubs we operate under our New York Sports Club (NYSC) brand
name. We are the largest fitness club operator in Manhattan with 36 locations
and operate a total of 86 clubs under the NYSC name within a defined radius of
New York City. We operate 19 clubs in the Boston region and 15 clubs in the
Washington, DC region under our Boston Sports Club (BSC) and Washington
Sports Club (WSC) brand names, respectively and have begun establishing a
similar cluster in the Philadelphia region with six clubs under our
Philadelphia Sports Club (PSC) brand name. In addition we operate three clubs
in Switzerland. We employ localized brand names for our clubs to create an
image and atmosphere consistent with the local community, and to foster the
recognition as a local network of quality fitness clubs rather than a national
chain.

Our operating and selling expenses are comprised of both fixed and
variable costs. The fixed costs include salary expense, rent, utilities,
janitorial expenses and depreciation. Variable costs are primarily related to
sales commissions, personal training fees, advertising and supplies. As clubs
mature and increase their membership base, fixed costs are typically spread
over an increasing revenue base and operating margins tend to improve.

Historical Club Growth

The following table sets forth our club growth during each of the quarters
in 2002 and the first three quarters of 2003.

|                                                                  |  |      |     |      |  |    |     |    |  |       |     |    |  |    |     |    |  |  |     |   |  |  |     |  |  |  |     |  |  |  |     |  
|----------------------------------------------------------------- |  | ---- | --- | ---- |  | -- | --- | -- |  | ----- | --- | -- |  | -- | --- | -- |  |  | --- | - |  |  | --- |  |  |  | --- |  |  |  | --- | -
|                                                                  |  | 2002 |     | 2003
|                                                                  |  |      |     |     
|                                                                  |  | Q1   |     | Q2   |  | Q3 |     | Q4 |  | Total |     | Q1 |  | Q2 |     | Q3
|                                                                  |  |      |     |      |  |    |     |    |  |       |     |    |  |    |     |   
|Clubs at beginning of period                                      |  |      | 119 |      |  |    | 126 |    |  |       | 127 |    |  |    | 128 |    |  |  | 119 |   |  |  | 129 |  |  |  | 129 |  |  |  | 129 |  
|Greenfield clubs(a)                                               |  |      | 6   |      |  |    | 1   |    |  |       | 1   |    |  |    |    |    |  |  | 8   |   |  |  |    |  |  |  |    |  |  |  | 3   |  
|Acquired clubs                                                    |  |      | 1   |      |  |    |    |    |  |       |    |    |  |    | 3   |    |  |  | 4   |   |  |  |    |  |  |  |    |  |  |  |    |  
|Sold, closed or relocated clubs                                   |  |      |    |      |  |    |    |    |  |       |    |    |  |    | (2  | )  |  |  | (2  | ) |  |  |    |  |  |  |    |  |  |  | (3  | )
|                                                                  |  |      |     |      |  |    |     |    |  |       |     |    |  |    |     |    |  |  |     |   |  |  |     |  |  |  |     |  |  |  |     |  
|Clubs at end of period(b)                                         |  |      | 126 |      |  |    | 127 |    |  |       | 128 |    |  |    | 129 |    |  |  | 129 |   |  |  | 129 |  |  |  | 129 |  |  |  | 129 |  
|                                                                  |  |      |     |      |  |    |     |    |  |       |     |    |  |    |     |    |  |  |     |   |  |  |     |  |  |  |     |  |  |  |     |  
|Number of partly-owned clubs included at the end of the period(c) |  |      | 2   |      |  |    | 2   |    |  |       | 2   |    |  |    | 2   |    |  |  | 2   |   |  |  | 2   |  |  |  | 2   |  |  |  | 2   |  



---

|(a) |  | A Greenfield club is a new location constructed by us.                                                                                                                                                                                                       
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | As described in the September 11, 2001 Events discussion, a single club
was closed from September 2001 through August 2002 due to its proximity to
the World Trade Center. This club is included in the total clubs at end of
period for all periods presented.
|   
|(c) |  | We include in the club count wholly and partly-owned clubs. In addition
to the above count, as of the periods presented we managed two additional
clubs, in which we did not have an equity stake.                                                             

17



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##### Table of Contents



Results of Operations

The following table sets forth certain operating data as a percentage of
revenue for the periods indicated:

|                                                                                 |                                                                               |  |               |      |               |  |       |       |      |  |       |      |    |  |       |       |   
|-------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- |  | ------------- | ---- | ------------- |  | ----- | ----- | ---- |  | ----- | ---- | -- |  | ----- | ----- | --
|                                                                                 |                                                                               |  | Three Months  |      | Nine Months  
|                                                                                 |                                                                               |  | Ended         |      | Ended        
|                                                                                 |                                                                               |  | September 30, |      | September 30,
|                                                                                 |                                                                               |  |               |      |              
|                                                                                 |                                                                               |  | 2002          |      | 2003          |  | 2002  |       | 2003
|                                                                                 |                                                                               |  |               |      |               |  |       |       |     
|Revenue                                                                          |                                                                               |  | 100.0         | %    |               |  | 100.0 | %     |      |  | 100.0 | %    |    |  | 100.0 | %    
|                                                                                 |                                                                               |  |               |      |               |  |       |       |      |  |       |      |    |  |       |      
|Operating expenses:                                                              |                                                                               |  |               |      |               |  |       |       |      |  |       |      |    |  |       |      
|                                                                                 | Payroll and related                                                           |  |               | 40.1 |               |  |       | 37.7  |      |  |       | 40.5 |    |  |       | 38.0  |   
|                                                                                 | Club operating                                                                |  |               | 32.3 |               |  |       | 33.1  |      |  |       | 31.2 |    |  |       | 31.6  |   
|                                                                                 | General and administrative                                                    |  |               | 6.1  |               |  |       | 6.5   |      |  |       | 6.2  |    |  |       | 6.1   |   
|                                                                                 | Depreciation and amortization                                                 |  |               | 9.5  |               |  |       | 10.1  |      |  |       | 9.9  |    |  |       | 9.8   |   
|                                                                                 |                                                                               |  |               |      |               |  |       |       |      |  |       |      |    |  |       |      
|                                                                                 | Operating income                                                              |  |               | 12.0 |               |  |       | 12.6  |      |  |       | 12.2 |    |  |       | 14.5  |   
|Loss on extinguishment of debt                                                   |                                                                               |  |              |      |               |  |      |       |      |  |      |      |    |  | 3.0   |      
|Interest expense                                                                 |                                                                               |  | 5.1           |      |               |  | 7.8   |       |      |  | 5.2   |      |    |  | 6.6   |      
|Interest income                                                                  |                                                                               |  |              |      |               |  | (0.2  | )     |      |  |      |      |    |  | (0.1  | )    
|                                                                                 |                                                                               |  |               |      |               |  |       |       |      |  |       |      |    |  |       |      
|                                                                                 | Income from continuing operations before provision
for corporate income taxes |  |               | 7.0  |               |  |       | 5.0   |      |  |       | 7.0  |    |  |       | 5.0   |   
|Provision for corporate income taxes                                             |                                                                               |  | 3.5           |      |               |  | 2.3   |       |      |  | 3.3   |      |    |  | 2.3   |      
|                                                                                 |                                                                               |  |               |      |               |  |       |       |      |  |       |      |    |  |       |      
|                                                                                 | Income from continuing operations                                             |  |               | 3.5  |               |  |       | 2.7   |      |  |       | 3.7  |    |  |       | 2.7   |   
|Loss on discontinued operations, net of income tax benefit                       |                                                                               |  | 0.9           |      |               |  |      |       |      |  | (0.3  | )    |    |  |      |      
|Cumulative effect of a change in accounting
principle, net of income tax benefit |                                                                               |  |              |      |               |  |      |       |      |  | (0.3  | )    |    |  |      |      
|                                                                                 |                                                                               |  |               |      |               |  |       |       |      |  |       |      |    |  |       |      
|                                                                                 | Net income                                                                    |  |               | 2.6  |               |  |       | 2.7   |      |  |       | 3.1  |    |  |       | 2.7   |   
|Accreted dividend on preferred stock                                             |                                                                               |  | (3.6          | )    |               |  | (1.9  | )     |      |  | (3.6  | )    |    |  | (3.6  | )    
|                                                                                 |                                                                               |  |               |      |               |  |       |       |      |  |       |      |    |  |       |      
|                                                                                 | Net income attributable to common stockholders                                |  |               | (1.0 | )%            |  |       | (0. 8 | )%   |  |       | (0.5 | )% |  |       | (0. 9 | )%
|                                                                                 |                                                                               |  |               |      |               |  |       |       |      |  |       |      |    |  |       |      

Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002

Revenues.Revenues increased approximately $5.5 million, or 6.7%, to
$86.8 million during the quarter ended September 30, 2003 from $81.3 million in
the quarter ended September 30, 2002. This increase resulted from the seven
clubs opened or acquired during the last quarter of 2001 (approximately
$921,000), and eleven opened or acquired during 2002 (approximately $3.4
million). Increases in revenues at three clubs opened during the third quarter
of 2003 were offset by decreases in revenues at the three clubs relocated in
the quarter. Revenues decreased during the quarter by approximately $339,000
or 0.5% at the Companys mature clubs (clubs owned and operated for at least 24
months). Revenue also increased $1.3 million due to on-account business
interruption insurance payments received in 2003 when compared to the same
period in 2002.

Operating Expenses.Operating expenses increased $4.3 million, or 6.0%,
to $75.9 million in the quarter ended September 30, 2003, from $71.6 million in
the quarter ended September 30, 2002. The increase was primarily due to a 3.4%
increase in total months of club operations (the aggregate number of full
months of operation during a given period for the clubs open at the end of such
period) to 385 in the quarter ended September 30, 2003 from 372 in the quarter
ended September 30, 2002, in addition to the following factors:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Payroll and related totaled $32.6 million in the quarters ended
September 30, 2002 and 2003. A $320,000 or 1.0% increase in payroll and
related was offset by a decrease in non-cash compensation expense. Non-cash
compensation expense decreased $290,000 from the quarter ended September 30,
2002 when compared to the quarter ended September 30, 2003. The non-cash
compensation expense incurred during the 2002 period principally related to
outstanding Series B stock options, and such stock options were exercised
during the first quarter of 2003.



| |                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Club operating increased by $2.6 million, or 9.8%, to $28.8 million in
the quarter ended September 30, 2003, from $26.2 million in the quarter ended
September 30, 2002. This increase is primarily attributable to the
acquisition or opening of eleven clubs in 2002.



| |                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | General and administrative increased by $682,000 or 13.6% to $5.7
million in the quarter ended September 30, 2003. This increase is primarily
due to increased information technology and related costs as well as
increases in liability insurance.

18



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Depreciation and amortization increased by $1.0 million, or 13.3% to
$8.8 million in the quarter ended September 30, 2003, from $7.8 million in
the quarter ended September 30, 2002. This increase is principally due to a
full period of depreciation and amortization for fixed asset additions,
acquisitions or club openings in 2002.

Interest Expense.Interest expense increased $2.6 million to $6.8 million
during the quarter ended September 30, 2003, from $4.1 million in the quarter
ended September 30, 2002. Interest expense increased $3.1 million due to the
increase in Senior Notes outstanding from $125.0 million to $255.0 million.
This increase was partially offset by decreases in interest on credit line and
subordinated credit borrowings, which were outstanding in 2002 but repaid on
April 16, 2003 in connection with the refinancing.

Interest Income.Interest income increased $141,000 to $179,000 during
the quarter ended September 30, 2003 from $38,000 in the quarter ended
September 30, 2002. This increase is due to an increase in cash and cash
equivalents on hand. Cash and cash equivalents on hand increased from $5.1
million in September 2002 to $55.8 million in September 2003 subsequent to the
April 2003 refinancing.

Provision (benefit) for Income Tax.The income tax provision for the
quarter ended September 30, 2003 was $2.0 million compared with $2.8 million
for the same period in 2002.

Loss on Discontinued Operations.In the fourth quarter of 2002, we closed
two remote underperforming, wholly-owned clubs. We have accounted for these two
clubs as discontinued operations and, accordingly, the results of their
operations have been classified as discontinued in the consolidated statement
of operations and prior periods have been reclassified in accordance with the
Financial Accounting Standards Board issued Statement No. 144, Accounting for
the Impairment or Disposal of Long-lived Assets. The net loss related to these
two clubs was $710,000 for the quarter ended September 30, 2002. Revenues and
pre-tax losses for these discontinued clubs were $459,000 and $1.2 million
respectively in the third quarter ended September 30, 2002. Included in the
pre-tax losses are $1.1 million of fixed asset write-offs related to these club
closures.

Accreted Dividends on Preferred Stock.Accreted dividends on preferred
stock decreased $1.3 million to $1.6 million during the quarter ended September
30, 2003, from $3.0 million in the quarter ended September 30, 2002. This
decrease is principally due to the redeemable senior preferred stock redemption
as part of the April 16, 2003 refinancing transactions.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002

Revenues.Revenues increased approximately $21.5 million, or 9.0%, to
$259.7 million for the nine months ended September 30, 2003 from $238.2 for the
nine months ended September 30, 2002. This increase resulted from the seven
clubs opened or acquired during the last quarter of 2001 (approximately $3.4
million), twelve opened or acquired during 2002 (approximately $14.1 million).
The three clubs that opened during the third quarter of 2003 contributed
revenue of $291,000 while revenue at the three clubs relocated during the
quarter decreased $718,000. In addition, revenues increased during the period
by approximately $2.1 million or 0.9% at the Companys mature clubs (clubs
owned and operated for at least 24 months). Revenue also increased $2.4
million due to on-account business interruption insurance payments received in
2003 when compared to the same period in 2002.

Operating Expenses.Operating expenses increased $13.1 million, or 6.3%,
to $222.2 million for the nine months ended September 30, 2003, from $209.1
million for the nine months ended September 30, 2002. This increase was
primarily due to a 4.2% increase in total months of club operations (the
aggregate number of full months of operation during a given period for the
clubs open at the end of such period) to 1,147 for the nine months ended
September 30, 2003 from 1,100 for the nine months ended September 30, 2002, in
addition to the following factors:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Payroll and related increased by $2.0 million, or 2.1% to $98.6 million
for the nine months ended September 30, 2003, from $96.6 million for the nine
months ended September 30, 2002. This increase was partially offset by a
$694,000 decrease in non-cash compensation expense. The non-cash
compensation expense incurred during the 2002 period principally related to
outstanding Series B stock options, and such options were exercised during
the first quarter of 2003.



| |                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Club operating increased by $7.9 million or 10.6% to $82.1 million for
the nine months ended September 30, 2003, from $74.2 million for the nine
months ended September 30, 2002. This increase was primarily attributable to
the opening or acquisition of twelve clubs in 2002.



| |                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | General and administrative increased by $1.1 million, or 7.6% to $15.9
million for the nine months ended September 30, 2003 from $14.8 million for
the nine months ended September 30, 2002. This increase is due to increased
information technology and related costs as well as increases in liability
insurance.

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| |                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Depreciation and amortization increased by $2.0 million, or 8.7% to
$25.5 million for the nine months ended September 30, 2003, from $23.5
million for the nine months ended September 30, 2002. This increase is
principally due to a full period of depreciation and amortization for fixed
asset additions, acquisitions or club openings in 2002.

Loss on extinguishment of debt.The $7.8 million loss on extinguishment
of debt is a result of the refinancing of our debt on April 16, 2003. In
connection with this refinancing, we wrote-off $3.7 million of deferred
financing costs related to extinguished debt, paid a $3.0 million call premium,
and incurred $1.0 million of additional interest on the 9 3/4% Notes
representing interest incurred during the 30 day redemption notification
period.

Interest Expense.Interest expense increased $4.7 million to $17.1
million for the nine months ended September 30, 2003, from $12.4 million for
the nine months ended September 30, 2002. Interest increased $4.7 million due
to the increase in Senior Notes outstanding from $125.0 million to $255.0
million. This increase was partially offset by decreases in interest on credit
line and subordinated credit borrowings, which were repaid on April 16, 2003 in
connection with the refinancing.

Interest Income.Interest income increased $281,000 to $397,000 for the
nine months ended September 30, 2003 from $116,000 for the nine months ended
September 30, 2002. This increase is due to an increase in cash and cash
equivalents during the nine months ended September 30, 2003 subsequent to the
April 2003 refinancing, when compared to 2002.

Provision for Income Tax.The income tax provision for the nine months
ended September 30, 2003 was $6.0 million compared to $8.1 million for the nine
months ended September 30, 2002.

Loss on Discontinued Operations.In the fourth quarter of 2002, we closed
two remote underperforming, wholly-owned clubs. We have accounted for these two
clubs as discontinued operations and, accordingly, the results of their
operations have been classified as discontinued in the consolidated statement
of operations and prior periods have been reclassified in accordance with the
Financial Accounting Standards Board issued Statement No. 144, Accounting for
the Impairment or Disposal of Long-lived Assets. The net loss related to these
two clubs was $826,000 for the nine months ended September 30, 2002. Revenues
and pre-tax losses for these discontinued clubs were $1.3 million and $1.4
million respectively for the nine months ended September 30, 2002. Included in
the pre-tax losses are $1.1 million of fixed asset write-offs related to these
club closures.

Cumulative Effect of Change in Accounting Principle.In connection with
the January 2002 implementation of SFAS 142 we recorded a goodwill write-off of
$1.3 million. A deferred tax benefit of $612,000 was recorded in connection
with this goodwill write-off resulting in a net cumulative effect of change in
Accounting Principle of $689,000 during the nine months ended September 30,
2002.

Accreted Dividends on Preferred Stock.Accreted dividends on preferred
stock increased $717,000 to $9.3 million during the nine months ended September
30, 2003, from $8.6 million in the nine months ended September 30, 2002. This
increase is principally due to the acceleration of the accretion to liquidation
value of the redeemable senior preferred stock in connection with its
redemption as part of the April 16, 2003 refinancing transactions.

Liquidity and Capital Resources

Historically, we have satisfied our liquidity needs through cash from
operations and various borrowing arrangements. Principal liquidity needs have
included the acquisition and development of new clubs, debt service
requirements and other capital expenditures necessary to maintain existing
clubs.

Operating Activities.Net cash provided by operating activities for the
nine months ended September 30, 2003 was $57.4 million compared to $43.5
million for the nine months ended September 30, 2002. Cash flows from
operations have improved with our increase in operating income, and in
addition, because of the favorable impact of managements exercise of stock
options in 2003, which provided us with a current tax deduction of
approximately $8.6 million.

Investing Activities.We invested $29.1 million in capital expenditures
during the nine months ended September 30, 2003. We currently estimate total
capital expenditure and asset acquisition requirements for the fourth quarter
of 2003 to approximate $16.6 million, which includes $7.3 million to renovate
and expand certain existing clubs, $2.5 million to equip and maintain certain
existing clubs, $6.4 million to commence or complete the construction of new
clubs and $400,000 to further upgrade our management information systems.

Financing Activities.On April 16, 2003 we successfully completed a
refinancing of our debt. This refinancing included an offering of $255.0
million of 9 5/8% Senior Notes (Notes) that will mature April 15, 2011, and
the entering into of a new $50.0 million senior secured revolving credit
facility (the Senior Credit Facility) that will expire April 15, 2008. The
Notes accrue interest

20



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##### Table of Contents



at 9 5/8% per annum and interest is payable semiannually
on April 15, and October 15. In connection with this refinancing, we wrote-off
$3.7 million of deferred financing costs related to extinguished debt, paid a
call premium of $3.0 million and incurred $1.0 million of interest on the 9
3⁄4% Notes representing the interest incurred during the 30 day redemption
notification period. The uses of proceeds from the Note offering were as
follows:

|                                                                   |  |          |         | 
|------------------------------------------------------------------ |  | -------- | ------- | 
|                                                                   |  | ($000s)
|                                                                   |  |         
|Redemption
of existing 9 3⁄4% Senior Notes, principal and interest   |  | $        | 126,049 | 
|Call
premium on existing 9 3⁄4% Senior Notes                         |  |          | 3,048   | 
|Redemption of senior preferred stock, at liquidation value         |  |          | 66,977  | 
|Repayment of line of credit principal borrowings and interest      |  |          | 4,013   | 
|Repayment of subordinated credit principal borrowings and interest |  |          | 9,060   | 
|Underwriting fees and other closing costs                          |  |          | 9,597   | 
|Available for general corporate purposes                           |  |          | 36,256  | 
|                                                                   |  |          |         | 
|Total use of funds                                                 |  | $        | 255,000 | 
|                                                                   |  |          |         | 

Management believes that the Company has sufficient funds to finance the
Companys current operating and growth plans through the end of 2004 and for
the foreseeable future.

We currently have a substantial amount of debt. As of September 30, 2003,
our total consolidated debt is $263.3 million. Our substantial debt could have
significant consequences, including:



| |  |  | Making it more difficult to satisfy our obligations;                                                                                                                                                                                                                   
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Increasing our vulnerability to general adverse economic and industry conditions;                                                                                                                                                                                      
|
| |  |  | Limiting our ability to obtain additional financing to fund future
working capital, capital expenditures, acquisitions of new clubs and
other general corporate requirements;                                                                                          
|
| |  |  | Requiring a substantial portion of our cash flow from operations for
the payment of interest on our debt and reducing our ability to use our
cash flow to fund working capital, capital expenditures, acquisitions of
new clubs and general corporate requirements; and
|
| |  |  | Limiting our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate.                                                                                                                                                

These limitations and consequences may place us at a competitive
disadvantage to other less-leveraged competitors.

Contractual and Commercial Commitments Summary.The aggregate long-term
debt, capital lease and operating lease obligations as of September 30, 2003
are as follows:

|                                   |  |                        |         |        |  |           |        |           |  |         |         |  |  |   |        |       |  |   |         | 
|---------------------------------- |  | ---------------------- | ------- | ------ |  | --------- | ------ | --------- |  | ------- | ------- |  |  | - | ------ | ----- |  | - | ------- | 
|                                   |  | Payments Due by Period
|                                   |  |                       
|                                   |  |                        |         |        |  | Less than |        |           |  |         |         |  |  |   |        | After
|Contractual Obligations            |  | Total                  |         | 1 year |  | 2-3 years |        | 4-5 years |  | 5 years
|                                   |  |                        |         |        |  |           |        |           |  |        
|Long-term debt (1)                 |  | $                      | 259,992 |        |  | $         | 1,350  |           |  | $       | 1,777   |  |  | $ | 954    |       |  | $ | 255,911 | 
|Capital lease obligations (2)      |  |                        | 3,294   |        |  |           | 2,847  |           |  |         | 447     |  |  |   |       |       |  |   |        | 
|Operating lease obligations (3)    |  |                        | 595,680 |        |  |           | 50,298 |           |  |         | 100,572 |  |  |   | 94,497 |       |  |   | 350,313 | 
|Redeemable preferred stock (4)     |  |                        | 38,585  |        |  |           |       |           |  |         |        |  |  |   |       |       |  |   | 38,585  | 
|                                   |  |                        |         |        |  |           |        |           |  |         |         |  |  |   |        |       |  |   |         | 
|Total contractual cash obligations |  | $                      | 897,551 |        |  | $         | 54,495 |           |  | $       | 102,796 |  |  | $ | 95,451 |       |  | $ | 644,809 | 
|                                   |  |                        |         |        |  |           |        |           |  |         |         |  |  |   |        |       |  |   |         | 

(1)  The long-term debt contractual cash obligations include principal
payment requirements only. Interest on our 9 5/8% Senior Notes amounts to
$24.5 million annually.    
(2) Capital lease obligations represent principal and interest payments.    
(3) Operating lease obligations include base rent only. Certain leases
provide for additional rent based on increases in real estate tax indexation,
utilities, and defined amounts based on the operating results of the lessee.    
(4) The redeemable preferred stock is not redeemable on a specific date,
but rather at our option or possibly upon sale of the company. For purposes of
this schedule we consider this to be redeemable after five years.

Recent Accounting Pronouncements

In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liability and Equity (SFAS
150), which establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. As of September 30, 2003
the Company does not have financial instruments within the scope of this
pronouncement.

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In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. Interpretation No. 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entitys activities or is
entitled to receive a majority of the entitys residual return or both.
Interpretation No. 46 also provides criteria for determining whether an entity
is a variable interest entity subject to consolidation. Interpretation No.46
requires immediate consolidation of variable interest entities created after
January 31, 2003. For variable interest entities created prior to February 1,
2003, consolidation is required on October 1, 2003. The Company does not
believe the adoption of Interpretation No. 46 will have a material effect on
the consolidated financial statements.

Forward-Looking Statements

Certain statements in this report on Form 10-Q of the Company for the
three and nine month period ended September 30, 2003 are forward-looking
statements, including, without limitation, statements regarding future
financial results and performance, capital expenditures, and potential sales
revenue. These statements are subject to various risks and uncertainties, many
of which are outside the control of the Company, including the level of market
demand for the Companys services, competitive pressures, the ability to
maintain current operating margins and to continue to integrate acquisitions,
the application of Federal and state tax laws and regulations, and other
specific factors discussed herein and in other Securities and Exchange
Commission filings by the Company. The information contained herein represents
managements best judgment as of the date hereof based on information currently
available; however, the Company does not intend to update this information,
except as required by law to reflect development or information obtained after
the date hereof and disclaims any legal obligation to the contrary.




Item 3.Quantitative and Qualitative Disclosures About Market Risk



| |                
| | ---------------
| | Not applicable.




Item 4.Controls and Procedures

(a)  The Company carried out an evaluation as of the end of the period
covered by this report, under the supervision and with the participation of the
Companys management, including the Chairman, Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures as defined in Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934. Based upon that
evaluation, the Chairman, Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures are effective
in ensuring that information required to be disclosed by the Company in the
report that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Security and Exchange Commission rules and forms. The Company
continuously considers opportunities to enhance controls and procedures. In the
second quarter of 2003 the Company began the rollout of a new point-of-sale
club management system. This system provides for operating and accounting
efficiencies and enhances the Companys ability to bill members electronically
as well as monitor usage and revenue at the member level. The Company expects
this rollout to be substantially complete in the fourth quarter of 2003.

(b)  There have been no significant changes in the Companys internal
control over financial reporting identified in connection with the evaluation
described in paragraph (a) above that have materially affected or are
reasonably likely to materially affect the Companys internal control over
financial reporting.

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PART II. OTHER INFORMATION




Item 1.Legal Proceedings.

On February 13, 2003, an individual filed suit against the Company in the
Supreme Court, New York County, alleging that on January 14, 2003, he sustained
an injury at one of our club locations resulting in serious bodily injury. His
complaint seeks $250.0 million in damages for personal injuries, in addition to
$250.0 million of punitive damages. The Company has in force $51.0 million of
insurance coverage to cover claims of this nature. The Company intends to
vigorously contest this lawsuit and presently anticipates that these matters
will be covered by insurance.

In addition, the Company is party to various lawsuits arising in the
normal course of business. Management believes that the ultimate outcome of
these matters will not have a material effect on the Companys consolidated
financial position, results of operations or cash flows.




Item 2.Changes in Securities.

Not applicable.




Item 3.Defaults Upon Senior Securities.

Not applicable.




Item 4.Submission of Matters to a Vote of Security Holders.

Not applicable.




Item 5.Other Information.

Not applicable.




Item 6.Exhibits and Reports on Form 8-K.



| | (a) |  | Exhibits                                                                                                                           
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002                                               
|
| |     |  | Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002                                               
|
| |     |  | Exhibit 31.3 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002                                               
|
| |     |  | Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002
|
| |     |  | Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
| | (b) |  | Reports on Form 8-K                                                                                                                
|
| |     |  | No reports on Form 8-K were filed during the third quarter of 2003                                                                 

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SIGNATURES

Pursuant to requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                       |  |                                                 
|---------------------- |  | ------------------------------------------------
|                       |  | TOWN SPORTS INTERNATIONAL, INC.
(Registrant)    
|                       |  |                                                 
|DATE: November 4, 2003 |  | By: /s/ RICHARD PYLE                            
|                       |  | Richard Pyle                                    
|                       |  | Chief Financial Officer, Office of the President
|                       |  | (principal financial, accounting officer)       
|                       |  |                                                 
|DATE: November 4, 2003 |  | By: /s/ ROBERT GIARDINA                         
|                       |  | Robert Giardina                                 
|                       |  | Chief Executive Officer                         
|                       |  | (principal executive officer)                   

24